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PRINCIPLES 

OF 

THE NEW ECONOMICS 



CROWELL'S 
SOCIAL SCIENCE SERIES 

EDITED BY 

SEBA ELDRIDGE 
Department of Sociology, University of Kansas 

Principles of the New Economics 

By Lionel D. Edie, Colgate University 

Ab Introduction to the Study of Labor Problems 

By Gordon S. Watkins, University of Illinois 
(In press) 

Crowds, Groups and the Great Society 
By John Collier. (In press) 

IN PREPARATION 

History of Socialism 

By Harry W. Laidler 

International Government 

By Jessie Wallace Hughan 

THOMAS Y. CROWELL COMPANY 



PRINCIPLES 

OF THE 

NEW ECONOMICS 



BY "'v;^ 

LIONEL D. EDIE ■ 

ASSOCIATE PBOFESSOE OF HISTORY AND POLITICS 

DIVISION OF CURBENT INDUSTRIAL PROBLEMS 

COLGATE UNIVERSITY 



CROWELL'8 SOCIAL SCIENCE SERIES 

EDITED BY 

SEBA ELDRIDGE 
University of Kansas 



NEW YORK 

THOMAS Y. CROWELL COMPANY 

PUBLISHERS 






Copyright, 1922, 
By THOMAS Y. CROWELL COMPANY 



Printed in the Umted States of America 



m 27 1922 

0)C!,A661444 



DEDICATED TO MY WIFE 

MARIE BRUCE EDIE 



EDITOR'S NOTE 

There is an increasing recognition of the necessity of 
approaching economic topics and problems from the psycho- 
logical and historical viewpoints, as well as from the stand- 
point of the classical economists; and also of taking into 
account the far-reaching effects on economic processes pro- 
duced by the industrial applications of modern science. 
Indeed, it is safe to say that our economic system can 
scarcely be comprehended unless it is viewed as an organi- 
zation, on a grand scale, of historical, mental and physical 
factors as these are prepared or revealed by scientific in- 
quiry. Professor Edie's book offers an admirable intro- 
duction to economics considered as a realistic description of 
the economic system produced by these groups of factors. 

S. E. 



PREFACE 

The primary purpose of this volume is to integrate the 
varied developments of recent years in economic thinking, 
and to relate them to the body of economic ideas which have 
been evolved through a long history of economic reflection. 
A number of departures from the orthodox economic doc- 
trines prevalent at the close of the last century have led to 
the development of several important schools of new eco- 
nomic thought. Each separate school has departed from 
the worn and beaten paths of economic theory in ways dis- 
tinct and peculiar to itself, and each represents an inde- 
pendent and original direction of economic interpretation. 
In the early stages of such a movement in economic think- 
ing, it is natural for both the adherents and critics of each 
branch of the movement to interest themselves in the unique 
and unusual features of the new doctrines of each inde- 
pendent branch. The stage has been reached, however, 
when it is of deep importance that the several divergent 
tendencies in economic interpretation should be integrated 
in their fundamental relations, The attempt at such an 
integration takes full cognizance of the many contradic- 
tions and inconsistencies between the various branches of 
thought, but it also acknowledges fully the many basic ways 
in which the various branches are supplementary and co- 
ordinate. The guiding principle of this volume is that the 
true value of all the independent developments in recent 
economic thought is realized not merely from a view of 
each branch of thought by itself, but more completely from 
a view of the composite evolution in economic thinking. 
The recent pluralistic progress in economic thinking has a 
fundamental unity. 

vii 



viii Preface 

Some of the outstanding branches of economic thinking 
may be mentioned for the sake of illustrating the scope of 
this undertaking. There has appeared within the last few- 
years a powerful psychological school of economic thinkers, 
whose distinctive characteristic is not that they have intro- 
duced psychology into economic theory, for earlier schools 
of value theorists made that introduction some time ago; 
but that they have introduced a new type of psychol- 
ogy into economic thinking, — ^the scientific psychology 
which has made its monumental discoveries and progress 
during the last two decades or so. This scientific psychol- 
ogy has, as John Dewey observes, displaced the exploded 
psychology of the nineteenth century, and has brought out 
the advances embodied in modern social psychology, com- 
parative psychology, behavioristic psychology, normal and 
abnormal psychology, and numerous other special fields of 
modern psychological research and discovery. The psycho- 
logical developments in economic thinking are at bottom 
in thorough harmony with what has been called "institu- 
tional economics." Moreover, these schools of modern eco- 
nomic thought integrate in fundamental ways with descrip- 
tive economics, with functional economics, with social 
economics, with price economics, with dynamic economics, 
or with welfare economics. The paramount and striking 
feature of these several branches of economic thought is the 
fact that in their general bearing and broad scope they 
represent a great forward movement in the interpretation 
of the economic phases of life. 

It should not be assumed that a recognition of recent 
advances in economic theory implies a repudiation of old 
economic theory. The old economic theory, it is true, is 
charged with many fallacies, but at heart its principles 
were enduring. Probably the chief cause of uneasiness in 
fields of economic thought has been the feeling that former 
economic theory was inadequate. Many of its doctrines are 
essentdal, but are too limited to account fully for economiQ 



Preface ix 

life. Hence, the present integration of recent tendencies in 
economic thinking has an ungrudging tolerance for a large 
part of previous economic thinking. The spirit of this 
study is not to cut loose from the orthodox theory of the 
recent past, but to associate the new with the old in their 
rightful relationships. 

This process of integrating the new and relating it to the 
old necessarily involves much comparison and contrast of 
economic doctrines. The literature of the field presents an 
endless amount of controversy and dispute. However, the 
method of the present volume is not to controvert, to dis- 
pute or to argue, but rather to make as direct and clear a 
statement as possible of the integrated and related bodies of 
interpretation. No attempt is made to explain the ways 
and processes by which the present organization of thought 
has been arrived at, for the simple reason that such an 
explanation would involve a volume of controversy. Nor is 
the discussion contained in these chapters framed for the 
purpose of convincing professional economists of the de- 
fensibility of the author's views. The positive endeavor is 
to state the body of thought in a form which can be readily 
understood by a university student or by a general reader 
of good intelligence. It is hoped that such a statement of 
the body of thought will be convincing to economists, and 
the writer prefers to let the plain statement of the ease do 
what convincing it will, rather than to confuse the state- 
ment by entering constant anticipations of objections and 
criticisms. The method is expository and non-controversial. 

In the course of the work of constructing the book, deeply 
appreciated help has been received, either in the form of 
critical suggestions about the organization of the thought 
or of sympathetic reading of parts of the manuscript, from 
Dr. Leon C. Marshall, Dean of the School of Commerce and 
Administration, of the University of Chicago; Dr. Elmer 
Burritt Bryan, President of Ohio University; Mr. Ordway 
Tead, Bureau of Industrial Research of New York City; 



X Preface 

Dr. H. G. Good, Associate Professor of Psychology and 
Education, of Colgate University; Professor J. M. Short- 
liffe, head of the Department of Economics, of Colgate 
University; Professor E. W. Smith, head of the Depart- 
ment of Rhetoric ; Dr. F. H. Allen, head of the Department 
of History and Politics; Associate Professor C. E. Gates, 
Associate Professor C. A. Kallgren, and Mr. R. M. Gidney, 
Controller at Large, Federal Reserve Bank of New York. 
The author is, of course, solely responsible for the contents 
of the volume. 

Cordial appreciation is also due many friends and stu- 
dents who have aided in many ways in carrying on the work. 

I am especially glad to enter here a full recognition of the 
partnership of my wife in all phases of the undertaking. 
Her thoughtful and patient collaboration is embodied in 
each page of the volume. 

Lionel Danforth Edie. 

March 21 ,1922. 



CONTENTS 

PART I— ECONOMIC PSYCHOLOGY 

CHAFTBX PAGB 

I. The Significance of Psychology in Economics . . 1 

4 II. Economic Expression of Instincts 8 

•^ The Instinct of Workmanship — The Instinct of Posses- 

sion — Disposition to Self-Assertion — Instinct of Sub- 
missiveness — The Parental Instinct — Sex Instinct — The 
Gregarious Tendency — Instinct of Flight and Fear — 
Pugnacity and Rivalry — Some Instincts of Minor Sig- 
nificance — Hunting — The Housing Instinct — The In- 
stinct of Migration — The Instinct of Play — Disposition 
to Mental Activity. 

III. The Obganization of Human Natube 39 

Habit — Imitation, Sympathy, Suggestion — Inequalities 

of Human Equipment. 

IV, Human Adaptation to Economic Environment . . 52 
Discipline — Elimination — Sublimation — Rational- 
ization — Revolt. 

PART n~ECONOMIC INSTITUTIONS 

AND FUNCTIONS 

V. The Mechanical and Scientific Basis of Economics 72 
Machinery — Transportation — Chemistry — Geology 
— Electricity — The Science of Economic Organization — 
Psychology of Industrial Engineering. 

J VI. Labor: Its Part in Production 99 

f^ The Job — Hours of Work — ^Wages — Standard of Living 

— Incentives — Bargaining Power — Custom and Habit — 
Wages and Labor Efficiency — Power — Environment — 
The Mind of the Worker — Immigration — Population 
— ^Economic Significance of the National Character. 



•2: 



5?-^ 



xii Contents 

CRAPTXK PACB 

VII. Capital: The Rights and Duties of Ownebship . . 175 
Statistics of Wealth and Income — Interpretation of the 
Facts — Property a Group of Rights — Ownership as a 
Corporate Phenomenon — The Principles of Minimum 
and Surplus — Inequalities Due to Unequal Privileges — 
Monopoly Privileges a Cause of Inequalities — Unfore- 
seen Chance as a Cause of Inequalities. 

VIII. Management: Its Technique and Responsibilities . 236 
Classification of Types of Management — The Mechanism 
of Corporation Management — Technique of Executive 
Direction — Business Combination and Concentration of 
Management — Reasons for the Combination Movement 
— Successes and Failures in Combination. 

IX. Markets: Their Principles and Strategy . . . 279 
The Cost of Production Theory of Prices — Supply and 
Demand — The Analysis and Creation of Demand — ^Ad- 
vertising — Sales Management — Guidance of the Ratio 
Between Supply and Demand — Variations from the 
General Principles of the Market — Market Mechanism 
Geographically Considered — Market Mechanism Func- 
tionally Considered — Price Movements in Various 
Stages of the Market Process — Price Policies — Below 
the Market Level — Above the Market Level — Business 
Combinations and Price Policies — Monopoly Price and 
What the Traffic Will Bear — Monopolies and the Steady- 
ing of Prices — Price Discrimination — The Science of 
Spending Money — Technology for Guidance of Con- 
sumption. 



f 



Money and Credit: Their Services and Dangers . . 366 
Forms of Money — Banking and Commercial Credit 
— Forms of Loans — Discounts — The Network of Finan- 
cial Institutions — Savings Banks — Trust Companies — 
Foreign Investment Banking — Other Financial Organi- 
zations — Federal Reserve System — Centralization — Note 
Issue — Deposit Currency — Reserves — Clearance and 
Other Functions — International Banking and Credit 
— The Principles of Foreign Exchange — The Dangers of 
the Credit System — Business Cycles — Psychological 
Foundations of the Credit System. 



Contents xiii 

PART in— ECONOMIC ADAPTATION 

CHAPTM r^GS 

XI. Public Control 453 

General Regulations of Business — Governmental Control 
of Labor — Reform — Public Opinion and Public Control. 

XII. Economic Radicalism 487 

General Characteristics of Radicalism — Particular 
Types of Radicalism — ^Economic Analysis of Socialistic 
Proposals. 

XIII. Economic Democeacy 499 

Fundamental Conceptions — Democracy a Process of 
Growth — Works Councils — Labor Unions. 

INDEX 621 



PART I 
ECONOMIC PSYCHOLOGY 



CHAPTER I 
THE SIGNIFICANCE OF PSYCHOLOGY IN ECONOMICS 

I Economics is the science of human nature in its relations 
to the ordinary business of life. It involves a threefold 
analysis, — ^first, of the motives and satisfactions of men in 
their dealings with wealth; second, of the processes and 
organization by which wealth is controlled; third, of the 
forces and directions of improvement and change. Thus 
economics has a human factor, an organization factor, and 
a progress factor. Economics is the science of all three 
as a unit and to study any one exclusively is to secure only 
a partial analysis of the science.^ 

The human side of economics is approached chiefly by 
psychology. Men are the vital part of the economic order. 
It is men who invent machinery and make scientific dis-i 
coveries. It is men who operate machines and guide th& 
process. It is men who compete for the ownership of 
property and who manage the economic system from top 
to bottom. It is men who bring about progress in the 
countless parts of the system. It is to satisfy the needs 
and wants of men that all economic activity is carried on. 
-The human factor of economics is fundamental, and the 
science of this human factor is economic psychology. 

Psychology approaches the problem by a study of the 
primary motives of conduct. Psychology attempts answers 

iSee Alfred Marshall, "Principles of Economics," p. 1. Seventh, 
edition. 



2 The Significance of Psychology in Economics 

to the questions, — Why do men behave in the business 
world as they do? Do these forms of behavior make for 
the proper amount of satisfaction and welfare? What 
other forms of behavior are possible and practicable? 
What are the chief motives which urge men forward in 
their whole dealing with these questions of wealth? 

Men are bundles of tendencies to act. Whether in the 
banker 's office, or around the table of the board of directors, 
or on the salesman's route, or at the worker's machine, men 
are aggregates of urges to act in certain directions. In 
technical psychological terms, these tendencies are instinc- 
tive tendencies. For purposes of economic thinking they 
are as well termed dispositions, or urges, or motives, or 
drives,^ A comprehensive definition of them is given by 
McDougall as follows: "The human mind has certain in- 
nate or inherited tendencies which are the essential springs 
or motive powers of all thought and action, whether indi- 
vidual or collective, and are the bases from which the 
character and will of individuals and of nations are grad- 
ually developed under the guidance of the intellectual 
faculties. . . . Directly or indirectly the instincts are the 
prime movers of all human activity; by the conative or 
impulsive force of some instinct (or of some habit derived 
from an instinct), every train of thought however cold and 
passionless it may seem, is borne along toward its end, and 
every bodilj^ action is initiated and sustained. The instinc- 
tive impulses determine the ends of all activities and sup- 
ply the driving power by which all mental activities are 
sustained. . . . Take away these instinctive dispositions 
with their powerful impulses, and the organism would 
become incapable of activity of any kind; it would lie 
inert and motionless like a wonderful clockwork whose 
mainspring had been removed or a steam engine whose 

1 For discussion of definitions of instinct, see McDougall, "Social 
Psychology," pp. 23-29; O. Tead, "Instincts in Industry," p. 5; T. 
Veblen. "Instinct of Workmanship," Chapter I; G. Wallas, "The 
Great Society," Chapter I; M. Parmelee, "Science of Human Be- 
havior," Chapters XI, XII, XIII; E. Thorndike, "Original Nature 
of Man," pp. 1-5; J. B. Watson, "Psychology from the Standpoint of 
a Behaviorist," pp. 231-240, 261; H. C. Link, "Instinct and Value, 
American Journal of Psychology/, Jan., 1922, flf. 1-17. 



The Significance of Psychology in Economics 3 

fires had been withdrawn. These impulses are the mental 
forces that maintain and shape all the life of individuals 
and societies,"^ 

These impulsive forces cannot be classified in any hard 
and fast, absolute divisions. Indeed, such a cut and dried 
classification is unnecessary; as will appear from the fol- 
lowing list of some of the paramount tendencies. There 
is an urge to self-assertion toward leadership, mastery, » 
power, which makes men move heaven and earth to sit 
on a coveted board of directors and map out the policies 
of corporations. There is an instinct of possession or ' 
acquisition which drives men to the collection of great 
blocks of real estate or of multimillionaire fortunes. There 
is an instinct of workmanship or constructiveness, which * 
determines whether production shall be 50 per cent, or 
100 per cent, of its possibilities, and which virtually 
compels men of great genius |o~Vuild up the large business 
organizations of the modern\ day f?f?**#i^^sheer joy of 
achievement. There is a parektal instinct whiclMSnderlies • 
kindliness, sympathy, sacrifice and service, wherever it 
appears in the economic world, whether strictly within 
one's own immediate family or through the community at 
large. There is a sex instinct which is utilized effectively 
in a large part of advertising display, and which makes 
the proper entertainment of workers while off the job a 
highly important business problem. There is a herd in- ' 
stinct under whose force a rumor of pessimism may aid in 
dragging the financial community to a temporary or pro- 
longed state of depression, which may influence in vital 
ways the formation of labor unions, or which may deter- 
mine degrees of congestion of population in large indus- 
trial centers. There is an instinct of suhyiission which • 
may lead a corporation manager to prefer the status of a 
subsidiary in a large amalgamation to the status of an in- 
dependent cut-throat competitor, or which may detei'mine 
the attitude of workers toward movements for industrial 
democracy. There is an instinct of pugnacity which flashes . 
out from time to time in strikes or in the bitter struggles 
1 "Introduction to Social Psychology," p. 45. 



4 The Significance of Psychology in Economics 

of commercial competition. There is an instinct of curi- 
osity or thought which inspires the inventiveness of men, 
concentrates their mental powers on the possibilities of 
an ever better science of organization, and encourages 
countless endeavors at increased efficiency. There is a dis- 
position to fear which worries the business man with the 
dread of bankruptcy and strikes into the heart of the 
laborer the terrors of unemployment. 

It is not meant to give the impression that this sort of 
classification is all in all. The significance of the list is 
that it brings within small compass some of the para- 
mount dispositions of men in so far as those dispositions 
affect their economic conduct. From other standpoints, 
other groupings might be of greater practical value, but 
from the economic standpoint, the most useful procedure 
is to draw from psychology those parts which have most 
value for the study of economics. In the economic world, 
therefore, it is indispensable to recognize that men move 
and work and plan and achieve in response to certain 
primary springs of action, — ^^such as the desire for power, 
or ownership, or achievement, or parental satisfaction, or 
sex contentment, or herd unity, or submission, or pug- 
nacity, or thought. 

With this brief picture of some of the predominant ten- 
dencies in mind, some important characteristics of their 
activity can be pointed out with greater definiteness. Fijst 
of all they are born into the human being. Through 
hundreds of generations they have been built into the life 
blood of the human race. They are hereditary tenden- 
cies in human nature, passed on from generation to gen- 
eration, primitive, ineradicable, inescapable, the stuff of 
which human nature is made. They are all part and 
parcel of man's inheritance, his racial birthright, and in 
their applications to his modern economic life, this origin, 
with all that it implies of vitality and power, needs to be 
held vividly in mind. 

A second important characteristic of these tendencies 
is their dynamic quality. They push and urge and drive 
men from mthin. There is something compelling about 



The Significance of Psychology in Economics 5 

them. They do not make for quiet, but for change. They 
are the restless qualities, the forces behind initiative. They 
are motives to behavior, sources of animation, filled with 
purpose and desire and aspiration. From the town loafer 
to the captain of industry, they are drives toward be- 
havior. Under their urge, growth, life, change is the key- 
note of the economic world. They are the incentives 
behind the hundreds of thousands of inventions of industry, 
behind the explorations which have opened the world to 
commerce, behind the gigantic business combinations and 
the myriads of lesser enterprises, — behind the whole eco- 
nomic organization. 

A third important feature is their pliability. At birth, 
they are general tendencies, indefinite urges, broad forces. 
By development and experience the tendency to self-asser- 
tion may lead to the struggle for power as a labor leader 
or as a corporation president. Environment, family, school, 
reading all serve from early life to mold and shape and 
fashion a particular tendency in certain ways. Every out- 
side influence counts in the application of the basic ten- 
dencies to the channels of life. A man born with a dom- 
inant love of power will weld all these outside influences 
into the real metal of his nature, and whether in states- 
manship or finance or education or labor, will be a leader 
under the domination of the original tendency to power. 
So with all the instincts. At birth they are ''unlearned 
tendencies. ' ' Childhood and the experiences of adult years 
color and shape them, but they are still true to their 
essence. 

A fourth important feature is their interplay. One 
separate tendency does not commonly hold exclusive sway. 
Parental love, possessiveness, self-assertiveness may, for 
example, combine in any proportion among themselves, or 
with any of the other tendencies to produce behavior. 
But in most of the affairs of industry, some one tendency 
or small group of tendencies is paramount in the policies 
of the individual, the class, or the nation. Different in- 
stincts may leap into the ascendency at different times. 
Pugnacity may master the man to-day and fear to-morrow. 



JfU 



6 The Significance of Psychology in Economics 

There is interaction, combination, succession, waxing and 
waning, fitting the demands of the hour, rising to the 
occasion. 

Finally, the instinctive dispositions involve the phases 
described by McDougall as follows: "Every instance of 
instinctive behavior involves a knowing of some thing or 
object, a feeling in regard to it, and a striving towards 
or away from that object. . . . We may then define an 
instinct as an inherited or innate psycho-physical disposi- 
tion which determines its possessor to perceive, and to pay 
attention to objects of a certain class, to experience an 
emotional excitement of a particular quality upon per- 
ceiving such an object, and to act in regard to it in a par- 
ticular manner, or, at least, to experience an impulse to 
such action. ' ' ^ For the biologist or physiologist or pure 
psychologist, it is often desirable to analyze and dissect 
the instinctive tendencies and concentrate attention upon 
their unit elements. But for purposes of economic psychol- 
ogy it is commonly more serviceable to think in terms of 
the whole disposition. We perceive danger, experience 
the emotion of fear and the impulse to escape. They are 
separate phases of a whole process, a total instinctive 
tendency. The usefulness of this conception is apparent 
from a more detailed definition of emotion. Angell ex- 
plains that ''All the more profound types of human emo- 
tions are based upon the life of instinct." Sherrington 
remarks of emotion, "If developed in intensity, it impels 
toward vigorous movement," and Cannon writes, "That 
the major emotions have an energizing effect has been com- 
monly recognized." The important conception therefore 
is the whole process, perceptual, emotional and energizing 
or impulsive, because the whole process is the determining 
factor in social and economic behavior. 

Considered in these ways, economic psychology is not one 
of the exact sciences. It is true, of course, that certain 
phases of psychological study can be reduced to exact 
measurement, such, for example, as intelligence tests, ad- 
vertising tests, fatigue studies, etc. However, in its gen- 
1 Social Psychology, pp. 27, 30. 



The Significance of Psychology in Economics 7 

eral aspects, it has to proceed without the units of measure- 
ment which prevail in physics or electricity or chemistry. 
There are no calories or meters or volts or grams in human 
dispositions. The dispositions are incapable of measure- 
ment by any form of yard stick or weighing scale. Motives 
and tendencies are always matters of more or less. The 
combinations of instincts allow for infinite variation. 
Mathematical exactitude is not the exclusive mental power 
In psychological thinking; an important power is judg- 
ment. Economic psychology is not for this reason any less 
a science. The test of a human science is not whether it 
is amenable to statistical computation ; the test is whether it 
marshals knowledge and experience to effective and ser- 
viceable ends. Economic psychology endeavors to come 
up to that fundamental test. In this respect psychology 
works with essentially the same technique as is employed 
in most of the phases of economic thinking and of social 
science thinking generally. 



CHAPTER II 
ECONOMIC EXPRESSION OF INSTINCTS 

The Instinct of Workmanship 

Men have an innate desire for constructive effort. They 
are disposed toward making something, building some- 
thing, fashioning something. Veblen has said, "Chief 
among those dispositions that conduce directly to the mate- 
rial well-being of the race and therefore to its biological 
success, is perhaps the instinctive bias here spoken of as' 
the instinct of workmanship." And James in a forceful 
chapter on the psychology of instincts declares, "Construc- 
tiveness is as genuine and irresistible an instinct in man 
as in the bee or the beaver. ' ' In explaining the paramount 
motive in his gigantic industrial achievements, Charles 
Schwab states, "Why do I work? What do I work for? 
... I work just for the pleasure I find in work, the satis- 
faction there is in developing things, in creating." 

It is not implied that this constructive motive is isolated 
from other motives in the lives of successful business men. 
The fundamental impression should be that with a sub- 
stantial group of business leaders, an enjoyment of con- 
structive achievement is a dominating motive. Such men 
are not animated solely or even primarily by the lure of 
a fortune, but by the lure of great creative achievement. 
This impulse is particularly outstanding in the engineer- 
ing feats of recent years, such as the erection of large 
bridges, the digging of tunnels, the building of sky- 
scrapers. Where this creative incentive is uppermost the 
achievements resulting usually have a high social value. 
The creative incentive is directed toward ends more ser- 
viceable to the community than are the incentives of pure 
profit and possession, and the tendency to consider business 

8 



Economic Exj^resdon of Instincts 9 

as one of the professions is a sign that more and more men 
endowed with the creative incentive will play a leading 
part in the business world. Managerial positions are de- 
manding in larger and larger proportions trained en- 
gineers whose chief ambition is not mere size of salary, 
but size of achievement. An economic society in which 
men imbued with this motive come to the top obviously 
has high social advantages. 

But what of the rank and file? Does an instinct of 
constructiveness exist in a coal miner or a machine feeder ? 
Probably most business men have believed at one time or 
another that the great bulk of laborers are utterly lacking 
in creative ambition and are dominated by an innate lazi- 
ness, a native disposition to soldier on the job. In spite 
of a widespread impression of this sort there have de- 
veloped in the industrial world hundreds of plant organi- 
zations where the laborers speed up production spontane- 
ously, enjoying the effort, displaying keen enthusiasm and 
a real instinct of workmanship. What has often been 
thought to be a disposition to loaf is found to be, on the con- 
trary, a lack of opportunity for expression of a dormant 
impulse to create and construct. 

Modern machine industry not only fails to present an 
opportunity for creative expression but positively stifles 
inclinations in that direction. To quote Herbert Hoover, 
"With the high specialization and intense repetition in 
labor in industrial processes there has been a loss of crea- 
tive interest. ' ' ^ And from a business viewpoint, John D. 
Rockefeller, Jr., states, "What joy can there be in life, 
what interest can a man take in his work, what enthusi- 
asm can he be expected to develop on behalf of his em- 
ployer, when he is regarded as a number on a payroll, a 
cog in a wheel, a mere * hand ' ? " ^ In the same vein an 
industrial engineer of wide experience writes, "If we take 
the standard of production as one hundred, I can say that 
it is impossible to force a man much above fifty and even 
then after a few days he will become rebellious and lag 

'^Industrial Management, May, 1920, p. 346. 
2 lUd., Nov., 1919, p. 404. 



10 Economic Expression of Instincts 

and the quality of the work will suffer. But if the creative 
power of that man be stimulated, he can almost constantly 
touch one hundred, apparently without the slightest 
effort."^ 

Recent experience in industrial effort is sufficient to in- 
dicate that production is doomed to remain at low levels, 
labor unrest is inevitable, human satisfaction in workman- 
ship is out of the question, high economic standards are 
hopeless unless industrial organization devises ways and 
means for bringing out this potential energy of the worker. 
A due expression of the instinct of workmanship, both in 
employers and in employees, has profoundest bearings 
upon wealth production. 

The Instinct of Possession 

Ownership, like constructiveness, satisfies a natural 
craving. Men instinctively seek to acquire objects of which 
they can say, ''These are mine." 

For a large class of people this impulse is paramount. 
To possess more and ever more brings to them the great 
joy of living. They are insatiable^ they never possess 
enough. The possession of money, or the property or 
goods which it represents, gives a real relish to life, and 
they acquire purely for the sensation of possessing on a 
gigantic scale. This motive has amassed many of the 
multimillionaire fortunes of the present day and has 
driven men on to the accumulation of properties vastly 
beyond the point where the properties could do them 
any personal good. 

Men animated primarily by acquisitiveness are found 
remarking, ''I'm not in business for my health," or "I'm 
after my pile and I'm going to get it," or "I admit I'm 
after the Almighty Dollar. Business is business." Men 
in whom this impulse is supreme have frequently been 
notorious for lack of a high social and ethical sense. When 
carried to extremes under its spell some captains of in- 
dustry have discredited themselves in the public esteem. 
But it has proved one of the most irresistible of human 

1 W. R. Bassett, "When the Workmen Help You Manage," p. 254. 



Economic Expression of Instincts 11 

motives and has fired men of great genius to mighty ac- 
complishments, sometimes good, sometimes otherwise. 

The wage worker too has a possessive disposition. In 
the eyes of the employer the wa,ge worker often appears 
to be animated almost solely by avarice for higher wages. 
There are many obstacles however to the worker's expres- 
sion of such an instinct. The worker has, of course, no 
claim to possession of the machine which he operates, or 
of the raw material which he handles, or of the finished 
product which he turns out. He has no possessive title to 
his job ; his employer has the right to hire and fire at will. 
If he lives in a tenement district or a company town he 
owns nothing in the form of a house, a garden, or a 
lawn. One thing he does own, however, and that is his 
labor. This he possesses and aims to sell under as good a 
bargain as he can strike. Here his impulse of possession 
often comes into vehement play. Demands for wage in- 
creases come in rapid succession. A great labor leader has 
offered to digest the aims of labor under three headings, 
"More, more, more." Laborers assert, ''"We're not in 
for a boom unless it booms us; ' ' Wage incentives, bonuses, 
piece-rates, rewards, are the ceaseless efforts of progressive 
employers to control and harness the workers' acquisitive 
nature. 

Farseeing employers have in some instances endeavored 
to link the possessive instincts of the workers with the best 
interests of the business by such devices as stock ownership, 
profit-sharing and thrift plans. It is anticipated, for in- 
stance, that ownership of a few shares of common stock 
with attendant dividends, will stimulate feelings of owner- 
ship which will identify the workers' interests with the in- 
terests of stock holders generally. The response to this 
sort of stimulus is still of doubtful force. 

Not all business men, however, or all laborers are dom- 
inated by the love of possession. A recent observer has 
ventured to write, "The real news about business, it seems 
to me. is that it is being administered by men who are not 
profiteers. The managers are on salary, divorced from 
ownership . . . the motive of profit is not their personal 



12 Econorrdc E oppression of Instincts 

motive. ' ' ^ Managers are on the increase whose paramount 
motives are similar to those of the soldier or the doctor or 
the teacher or the engineer, — non-possessive. Moreover, the 
frequent accusation that all labor wants is more wages 
fails to take into account the workers' non-financial in- 
stincts. After all, the latter group of instincts is funda- 
mental in the worker's life. To quote again Mr. Rocke- 
feller, Jr., "A man who recently devoted some months to 
studying the industrial problem and who came in con- 
tact with thousands of workmen in various industries 
throughout the country has said that it was obvious to him 
from the outset that the working men were seeking for 
something which at first he thought to be higher wages. 
As his touch with them extended, he came to the con- 
clusion, however, that not higher wages but recognition 
as men was what they really sought. ' '^ President Wilson 's 
Second Industrial Conference reported, "It cannot be 
denied that unrest in our industrial community is charac- 
terized more than ever before by the purposes and desires 
that go beyond the demand for higher wages and shorter 
hours. ' ' 

It is obvious that with both employers and employees, 
even where money-getting appears the chief aim in life, 
the money itself may be but a means to an end. The real 
end and aim may be creating a new invention, attaining a 
position of power or prestige or making possible a higher 
standard of living for one's family. All of the satisfac- 
tions of life are given a price value. In order to satisfy 
the non-possessive desires men have to acquire money. The 
end and aim of economic endeavor in such cases is not 
acquisition merely for the sake of acquisition. The real 
end and aim is to satisfy non-financial wants and am- 
bitions. 

But after all allowances have been made for these ex- 
ceptions and qualifications the fact remains that the pos- 
sessive instinct has a driving dynamic power in the eco- 
nomic world. A sheer delight in the collection of a huge 

1 W. Lippmann, "Drift and Mastery," p. 45. 

2 Industrial Management, Nov., 1919, p. 404. 



Economic Expression of Instincts 13 

fortune has impelled men to tireless business effort and 
has molded and directed perhaps more than any other 
single motive the economic system that now prevails. The 
possibility of its modification or partial displacement by 
other instincts has momentous significance for the economic 
community in the future. 

Disposition to Self-Assertion 

In the field of labor leadership it is common to find 
personalities who are moved not primarily by acqusitive- 
ness but by an intense impulse of self-assertion and mas- 
tery. The prevalence of such an instinct in varying de- 
grees of intensity is conspicuous in all business, circles. 
Self-assertive managers are fond of the warning, "This / 
is my business, I will run it as I please." Out of des-*^ 
perate rivalries, weathering of financial depressions, cut- 
throat competition, the most self-assertive men are apt to 
emerge triumphant, and to wield the power, mastery and 
leadership that they have won. The consciousness of such - 
power brings to thousands of great captains of industry 
the sweetest satisfaction which life affords and to attain 
to the heights of it, they give lifetimes of hazard, worry 
and exhausting toil. The ambition to win admission to an 
inner circle of financiers, to be quoted in affairs of great 
moment in the daily press, to be sought out for advice on 
legislative or international policies, to affect Presidential 
campaigns^ to hold high office on commercial committees, 
to swing a backing of 100,000 union men, in short, to ex- 
ercise power in the tide of human affairs, is one of man's 
most potent incentives to mighty deeds. 

For some people it is sufficient satisfaction merely to 
hold the power. They prefer to be confidential adviser 
to the president of the concern, to direct silently and un- 
seen the major affairs of the board of directors. They are 
satisfied to boss behind the scenes, to pull quietly the 
strings for other men to jump. They enjoy the power for 
its own sake, without ostentation or show or publicity. 

But more frequently the self-assertive character yields 
to the thrill of prestige and fame. He wants to be known 



14 Economic Expression of Instincts 

as the great railroad genius. He wants his position to be 
heralded as great. He wants other big men to know that 
he is big and he wants little men to recognize his superi- 
ority. To him power without fame is nothing ; power with 
fame is everything. Publicity gives the flushing touches 
to self-assertiveness. 

As with business leaders so with labor leaders there 
are different types. The walking delegate is in disrepute 
because of his extreme self-assertiveness. He has on vari- 
ous occasions swaggered into a shop, peremptorily ordered 
a strike and laid down an ultimatum, just to let every- 
body know who is boss around the works. His excessive 
craving for "showing off" his power, his extreme desire 
for ostentation and display, has made him a feared and 
hated figure in the industrial world. There are just as 
many labor leaders of another type who have built up 
reputations for sober and conservative use of the enormous 
^powers in their hands, with little care for fame and 
publicity. 

The ordinary laborer has this same impulse to self- 
assertiveness, even though often not in so powerful a 
degree, and his insistence on expressing the impulse is the 
direct cause of much economic difficulty. The status of 
labor as a mere ''hand," a commodity to be bought and 
sold like coal or pig iron, has been challenged by workers 
demanding a new status of recognition and power. The 
demand for a voice in those industrial issues which affect 
the welfare of labor, the movement for employee repre- 
sentation and the assertiveness of modern labor unions are 
traceable to an instinctive desire to have some real control 
over one's own work and life. The great obstacle to suc- 
cessful welfare work is the fact that the laborer has little 
or no voice in directing the welfare policies. The use 
of shop committees, employee representation and "indus- 
trial democracy" plans is an endeavor on the part of busi- 
ness men to harness this instinct of self-assertion and self- 
control to the interest of the business. Ideas of coopera- 
tion, or partnership, or even of a share in management 
between laborer and employer are a product of this deep- 



Economic Eccpression of Instincts 15 

seated human tendency. The worker craves the satisfac- 
tion of a degree of power and independence in his job 
and far-sighted employers are endeavoring to invent safe 
and sound ways and means to bind this outburst of human 
feeling to the practical necessities of successful business. 

Most laborers too are highly susceptible to appeals of 
display and show in their self-assertiveness. ''Pace set- 
ters" and "speeders" gloat over their superior skill and 
efficiency, and as a guard against their spurts of extreme 
energy labor unions have wisely established a standard. 
This standard is supposed to be the pace that a man can 
follow safely for a lifetime. Rivalry and competition be- 
tween individuals and departments is a means of firing 
their self-assertive impulses by the prospect of display. 
Prizes for machine operatives, photos of the fastest rivet- 
ers, posting of the relative rating of girls at telephone 
switchboards, all are utilized to draw upon the vanity of 
the worker and secure maximum self-assertion along pro- 
ductive lines. 

Thus the self-assertive impulses offer potential sources 
of rich energy for economic activity. Self-expression, 
mastery, leadership, power, display, fame, — all these alter 
the courses and consequences of the economic order, and 
lie at the center of economic science. 

Instinct of Submissiveness 

In contrast with the self-assertive impulses must be con- 
sidered the submissive impulses. Many men enjoy inertia, 
indifference, apathy, lethargy. The line of least resistance 
is to let well enough alone, accept things as they are and 
be content. To turn over the worries and risks and prob- 
lems to strong leadership is satisfying. The slave often 
preferred his slavery to the responsibilities of freedom, and 
the worker often prefers unconditional acquiescence in all 
the mandates of the shop, be they harsh, or pleasant, to the 
responsibilities of some form of industrial citizenship. The 
agitator encounters at every turn the willingness of his 
audience to bow to the inevitableness of things as they 
are. The labor union organizer is lucky to be able to get 



16 Economic Eccpression of Instincts 

even a minority in the industry to sign np, pay dues, at- 
tend meetings and shape policies ; the rest find it too much 
trouble. 

In national and state political conventions, it is notori- 
ous that time and again the slate is "doped out" by a 
boss or inside party leader; and the convention, relieved 
of the awful puzzle, receives the announcement with as 
great applause and hurrah as if it had shouldered the 
burden itself. The doctrine of non-resistance or pacifism 
applied to industrial life meets the impulses of hundreds of 
thousands in the rank and file. Roosevelt's warning not 
to "Chinafy" the U. S. was an effort to bring home to 
a people in a political way the lesson of the fruits of sub- 
missiveness, and the lesson is fully applicable to industrial 
affairs. The success of an open or a closed shop cam- 
paign must depend eventually upon the balance which is 
struck between the self-assertive and the submissive in- 
stincts of the parties concerned. A campaign in a particu- 
lar industry ''to smash the union" stakes everything upon 
the belief that a certain amount of submissiveness of the 
workers can be counted upon. The corporation president 
who claims that his workers can bring any grievance or 
suggestion to the superintendent or to himself personally 
does not take into account the feelings of inferiority and 
self-effacement in the laborer at the prospect of such an 
interview. But submissiveness is not by any means always 
forced upon the worker; it is as often the course of his 
own choice. It satisfies a real instinctive desire, a vital 
trait of human nature, and is just as much innate as any 
of the other major instinctive dispositions. 

The Parental Instinct 

That the parent feels an instinctive love for the child 
is too obvious to need argument. The love of the mother 
is commonly more intense than the love of the father, but 
with both, the affection between parent and child is one of 
the most vivid experiences of life and exercises momentous 
influences in the organization of society. The desire of a 
father to be with his children, to play and romp or to 



Economic E oppression of Instincts 17 

read and spin stories or merely to watch their antics, leads 
to a demand for a shorter work day with more leisure for 
home enjoyments. The desire to clothe and house and 
feed the laborer's family leads to demands for the where- 
withal in the form of increased wages. The desire to 
improve the family standards may lead the mother to take 
a factory job to increase thereby the family income; or 
conversely may lead her to insist on remaining at home 
to rear and train the children by her own direct care 
and supervision. Actions which superficially look sordid 
and greedy and selfish in labor groups are often domi- 
nated by underlying motives of parental solicitude, and 
to Gope with these situations, an understanding of the 
underlying motives is the height of necessity. 

Intimately allied with the parental regard for one's im- 
mediate kith and kin, is an original disposition to kindli- 
ness toward one's fellowmen generally. Wallas says "My 
opinion is that a certain degree of Love is stimulated by 
our perception of other human beings, both generally and 
particularly when we feel that it is within our power to 
injure or benefit them," and further he finds among men 
an "original Love and Pity for their fellow human be- 
ings as such. ' ' ^ And Thorndike writes that one aspect of 
original kindliness "is the positive satisfyingness of wit- 
nessing behavior characteristic of welfare in our fel- 
lows. . . . The happy behavior of others is pleasant, as 
flowers and sunshine and .food are. " ^ 

This original trait finds expression in those features of 
modern economic life which bear such names as sacrifice, 
reform, altruism, public spirit, welfare, humanitarian mo- 
tives, philanthropy, uplift, charity, service, the common 
good, etc. Those people who are steadily trying to "mix 
religion with business" are merely bringing to bear the 

1 "The Great Society," pp. 143, 147. 

2 Thorndike, "Original Nature of Man." "Whether this last issue 
{i.e., kindliness) is a consequence of the original bonds described 
under the instinct of motherly behavior or is a somewhat indepen- 
dent and differently specialized kindliness, is of little importance for 
our purpose. The former is the likelier. . . ." p. 103. 



18 Economic Expression of Instincts 

impulses which "underlie such great parental conceptions 
as the Fatherhood of God and the Brotherhood of Man. 

These religious ideas are parental metaphors, and 
are the stimuli for incentives to economic good will. Cer- 
tain individuals are endowed with exceptionally power- 
ful instinctive energies in this direction and commonly 
become the so-called Public Spirited leaders of their 
times. Our complex economic society is vitally de- 
pendent upon men of this caliber rising to positions of 
power and prominence from time to time. Personalities 
of this type take out some of the sordid and materialistic 
features of economic activity, and manage to radiate among 
others the contagion of their genuine love for their fellow 
men. 

The awakening of these kindly dispositions is the only 
means toward achieving amelioration of some of the black 
pains of the economic community. To quote Tansley, ' ' The 
instinct of human tenderness is the hope of the world. "^ 
The American people, by responding to appeals for charity 
during and immediately following the "World War, are 
reported to have saved the lives of 15,000,000 children 
across the Atlantic. Similar human impulses have brought 
into being, especially during the last ten years, a flood of 
child labor laws, minimum wage laws, eight hour laws, 
workmen's insurance laws, old age laws, maternity protec- 
tion laws, factory sanitation laws. Prohibitionist orators 
saturated the public imagination with mental pictures of 
the wrecked home, the beaten wife, and the degraded 
child, and the constitutional amendment was thereby as- 
sured. Leaders in the woman suffrage movement inces- 
santly appealed to the women of America to use the ballot 
to put the protection of the law over their sisters in in- 
dustry and their children on the streets and to put some- 
thing of the gentleness and tenderness of the mother's 
spirit into politics and economics. An aroused public con- 
science is intolerant of the sweatshop, and resents the high 
death rate of infants among the lowest paid workers' 
families in congested industrial centers. Wherever suf- 
1 "The New Psychology," p. 267. 



EcoTwmic E oppression of Instincts 19 

fering and distress and pain are found, there tends to arise 
a general social kindliness and pity, and if the emotions 
are aroused intensely enough, reform is forthwith achieved. 
In a recent effort to organize the steel workers, union 
delegates spread throughout the steel districts photographs 
of a woman alleged to have been murdered by agents of 
the.^company, and thereby made a powerful appeal to the 
general parental sympathy of the whole labor group. 

Another outgrowth of this general disposition to care 
for other people's welfare is the solicitude for the welfare 
of the succeeding generation. The conservation of natural 
resources makes an appeal directly to an instinctive de- 
sire to protect and conserve the welfare of ' ' our children 's 
children." Population questions, immigration regulations, 
warnings of race suicide, all are settled in light of an 
instinctive concern for a happy and comfortable posterity. 
Even the arguments deciding the relative amounts of reve- 
nue to be raised by loans and by taxation during the war 
were constantly guided by a spontaneous feeling that we 
must not hand on to the next generation any larger burden 
than might be absolutely necessary. This sense of social 
responsibility for the economic and human welfare of gen- 
erations yet to come is a constant, steadying influence in 
shaping the direction of economic movements. 

In a broad and comprehensive way, this original disposi- 
tion of kindliness is the same force which is often called 
service. And service is commonly contrasted with selfish- 
ness. Progressive and radical movements, in varying de- 
grees of course, throw out the challenge to what is called 
capitalism to establish a new motive of service in economic 
life. This challenge claims that economics today is pri- 
marily animated by private, non-humanitarian, unsacri- 
ficial motives. It claims that it must be animated by new, 
public, social, humanitarian motives. The retort often 
flies back, that human nature cannot be changed. Out of 
such a mental battle, there emerges this much that ought 
to be obvious, namely, that the economic order at present 
needs more of the public motive, and will suffer bitter at- 
tacks unless this motive is forthcoming, — ^but that any sud- 



20 Economic Expression of Instincts 

den shift to an economic society wMch depended abso- 
lutely or even primarily upon altruistic motives for its 
driving force would be ill fated. Economics must become 
more humanitarian, but the process must come by a grad- 
ual fusion of newly stimulated instincts with the old. To 
grasp this balancing and proportioning of private and 
public motives is a first essential in any attempt to under- 
stand the science of economics. 

Sex Instinct 

Discussing the sex instinct, McDougall remarks, "It is 
unnecessary to say anything of the great strength of its 
impulse or of the violence of the emotional excitement that 
accompanies its exercise." Probably the paramount eco- 
nomic implications of the sex instinct arise not so much from 
the expression of the instinct as from its repression. The 
consequences for economics of this repression will be taken 
up in a following chapter. 

Some branches of business depend to a very substantial 
extent upon a carefully planned excitement of this im- 
pulse. Advertising, for example, creates a demand for 
many lines of cosmetics, candies, silks, clothing, etc., by in- 
genuous forms of sex appeal. The method of appeal is 
based upon the desire to be attractive to the opposite sex ; 
hence any means of securing beauty or becoming attractive 
is in high demand. By different and well-known means 
a good proportion of the moving picture industry stakes its 
success upon the sex appeal. "The dress models of the 
wholesale clothing shops of New York are undoubtedly 
an enormously important and determining factor in the sale 
of women's dresses." ^ Good looking waitresses in restau- 
rants, pretty sales girls at store counters, attractive girls 
on magazine covers, all enter into the strategy of sales- 
manship. Consumers' motives in buying are thus very fre- 
quently influenced, even though unconsciously, by this sex 
impulse. 

Personnel administration encounters certain sex prob- 
lems. Girl operators of machines are often unwilling to 
I Ordway Tead, "Instincts in Industry," p. 36. 



Economic Expression of Instincts 21 

wear safe clothing or head dress while at the machines be- 
cause they hate the looks of ' 'safety first" styles. Whether 
to allow men and women to work in the same or separate 
machine rooms, how to maintain due protection and inde- 
pendence for women working under men bosses, how to 
keep the office girls from spending too many hours of the 
day before the mirror, are all personnel problems with a 
sex basis. Taken all in all, however, the direct expression 
of the sex instinct has only minor relations to economic 
life ; the instinct 's greatest bearing on economics arises from 
nervous consequences of its repression. 

The Gregarious Tendency 

Thorndike remarks: ''Man responds to the absence of 
human beings by discomfort and to their presence by posi- 
tive satisfaction." This gregarious tendency exercises a 
deep influence in economic groupings and over the chief 
policies which they carry out. Men incline to huddle to- 
gether, to think and act as a herd, to work and fight by 
groups. To mix with other people, to be one with them, 
to feel their presence, brings a contagious pleasurable sen- 
sation, and men's economic actions seek the maximum of 
this positive gregarious satisfaction. 

For one thing, the congestion of population in urban 
centers has causes directly traceable to this human ten- 
dency. The 1920 census reveals the fact that approximately 
one-half of the population of the country is now huddled 
inside the cities and towns with populations above 2500. 
A fundamental reason for this concentration of people is 
given by McDougall as follows: "It is the crowd in the 
towns, the vast human herd, that exerts a baneful attrac- 
tion on those outside it. . . . As in the case of the animals, 
the larger the aggregation the greater is its power of attrac- 
tion ; hence in spite of high rents, high rates, dirt, disease, 
congestion of traffic, ugliness, squalor, and sooty air, the 
large towns continue to grow at an increasing rate, while 
the small tovms diminish and the country villages are 
threatened with extinction. ' ' ^ 

1 McDougall, "Social Psychology," p. 302. 



22 Economic Expression of Instincts 

Because of the potency of this instinct we are faced 
with problems of housing, of city transportation, of food 
and fuel supplies, of location of industries, of organization 
of markets, of immigrant quarters, of Americanization, of 
adequate farm labor, of ' ' back to the land ' ' movements, of 
class struggle, of economic organization, and of large scale 
economic activity in general. 

"It is, however, sensitiveness to the behavior of the 
herd which has the most important effects upon the struc- 
ture of the mind of the gregarious animal. ... To know 
that he is doing what would arouse the disapproval 
of the herd will bring to the individual the same pro- 
found sense of discomfort which would accompany ac- 
tual physical separation, while to know that he is doing 
what the herd would approve will give him the sense of 
Tightness, of gusto, and of stimulus which would accom- 
pany physical presence in the herd and response to its 
mandate. . . . He is more sensitive to the herd than to 
any other influence. " ^ In thus emphasizing the grega- 
rious factor in mental life and behavior generally, Trotter 
indicates an explanation of some of the most widespread 
economic phenomena. Approved industrial morale exists 
where every worker is so thoroughly sensitive to the voice 
of the factory herd that he conforms wholeheartedly 
to the established rules, regulations, standards and ideas 
of the plant. Attacks by radicals, Reds or agitators upon 
the sensitiveness of this unit herd are resented bitterly. 

In time of strike, the herd is on the aggressive; it must 
"hang together or hang separately." Men by the thou- 
sands throw their lot in with the striking crowd, scarcely 
knowing the aims of the strike, but feeling the urge to 
stand by their labor herd. Employers, in similar form, rally 
to the colors of a leader who throws down a challenge on 
the open shop or some other great economic issue, because 
they are sensitive to the influence of the dominant note 
of the emplojdng group. 

This is an age of great associations of labor and capital. 

1 Trotter, "Instinct of the Herd in Peace and War," pp. 32, 40, 114, 
133. 



Economic Expression of Instincts 28 

Employers' Associations, Chambers of Commerce, Engi- 
neering Societies, Rotary Clubs, Manufacturers' Associa- 
tions in a great variety of forms spring from the impulses 
of men to defend their rights in unison, to protect their 
interests by group action. Laborers, through local branches, 
international unions, and huge federations, struggle for 
■what they conceive to be their rights, even their self- 
preservation, by throwing their resources under the con- 
trol of the herd, and working and fighting with a class 
consciousness. The shop committees, for instance, insist 
that the natural, logical and useful labor unit is the local 
shop or plant ; whereas, in sharp contrast, the trade union 
insists that the right labor herd is all men following a 
certain craft ; and again in further contrast the industrial 
union insists that the only adequate labor herd is one based 
upon all men in a given line of industry the country over. 
How best to apply the gregarious bond to economic life 
is therefore one of the salient problems of the present day. 

Moreover much of statesmanship is concerned with the 
economic loyalties of men to different groups. The class 
consciousness of labor in extreme forms found in the social- 
ist pleas for the Internationale, the World Brotherhood, 
the World Revolution, etc., is one thing; the patriotic 
allegiance to the nation as sovereign is another; the sup- 
port of an international League of Nations or world gov- 
ernment of some sort is still another thing. The distribu- 
tion of gregarious feeling within these three circles ob- 
viously conditions world politics, national strength, inter- 
national commerce, economic rivalries, and peace and war. 

James remarks, "The same acts performed with a crowd 
seem to mean vastly more than when performed alone." 
Men experience comfort and pleasure from being in an 
audience, or on a parade, or at a banquet with their fel- 
lows. Labor organizers get a mass meeting and harangue 
the crowd until they are swept into the union ranks. The 
spirit of the mob bursts out in terrific applause at the 
words of the speaker, whereas if the words were imparted 
to the individual on the street they would seem stupidly 
commonplace. The lynching party reveals the staid, re- 



24 Economic Expression of Insti^icts 

spected citizen furiously dragging and kicking the victim 
and feverishly tying the noose, and the strikers' mob com- 
mits acts of violence which individuals could never be 
persuaded to commit. 

The factory system, and the use of machinery and sci- 
ence have made modern economic life almost entirely a 
social affair. The directions of gregarious expression, the 
limits of herd organization, the centers of group loyalty, 
the possibilities of morale are fundamental economic issues. 
How to control men in the mass becomes a paramount 
economic problem. 

Instinct of Flight and Fear 

In McDougall's analysis, "The instinct to flee frbm 
danger is necessary for the survival of almost all species 
of animals and in most of the higher animals the instinct 
is one of the most powerful. . . . Fear, whether its 
impulse be to flight or to concealment, is characterized 
by the fact that its excitement, more than that of 
any other instinct, tends to bring to an end at once all 
other mental activity, riveting the attention upon its 
object to the exclusion of all others; owing, probably, to 
this extreme concentration of attention, as well as to the 
violence of the emotion, the excitement of this instinct 
makes a deep and lasting impression on the mind. . . . 
Fear, once aroused, haunts the mind; it comes back alike 
in dreams and waking life, bringing with it vivid memo- 
ries of the terrifying impression. ' '^ 

Instead of fears of the jungle, modern business supplies 
to all classes of the community economic fears which are 
almost equally compelling. Especially in periods of busi- 
ness depression is fear and emotion of great force. Work- 
ers by the millions are seized by the fear of losing their 
jobs, with the prospect which that entails of lost income, 
privation, worry and distress. Under the spell of such a 
fear, workers are said during the depression period to 
have a great spurt of workmanlike efficiency in the hope 
that a partial shut-down of the plant will find them picked 

1 "Social Psychology," pp. 51, 57. 



Economic Expression of ImtincU 25 

for their snperior efficiency to remain on the job. In 
describing these fears, Steinmetz writes, ''Over most of the 
workers hangs throughout all their life the fear of unem- 
ployment, the fear of sickness, the fear of old age. . . . 
It is these three great fears which distinguish the majority 
from the minority and make the former dissatisfied with 
society."^ In normal times many employes build the 
morale of their men on the fear-emotion by giving every- 
one to understand that a man is waiting at the factory 
gates to take his place if he fails to measure up to the 
employer's mark. For such a policy, a liberal supply of 
immigrants and a constant oversupply of labor are in- 
dispensable. 

Fear of the rival who is trying to steal a market from 
his competitors, fear of bankruptcy, fear of laborers 
threatening a strike, — these grip the business man from 
time to time. He may seek flight by retiring from business, 
or he may brave it out by submissiveness, or in extreme 
cases seek escape by the route of suicide, or he may be 
carried along through a strike, or be pushed into bank- 
ruptcy. 

Such periods leave indelible imprints on the memories of 
the victims. They are the mountain peaks of life and 
men ponder, puzzle and wonder about them at great length 
after they are past. Fear and flight smack of the primi- 
tive, of life and death, of struggles for existence, and 
arouse the whole nature to extremes of vivid experience. 
Insurance devices of many sorts have been devised to 
take out of industrial activity some of the more dangerous 
forms of fear, and to avert some of its distressing con- 
sequences. The immense growth of both workers' and em- 
ployers' insurance in recent years is an indication of the 
desire of men to diminish and control the element of 
fear in economic life. The excessive economic fears of the 
laboring groups are dangerous factors in industrial life 
for they are active causes of industrial nervousness, dis- 
content and unrest. A sound industrial morale is jeopard- 
ized by an extreme discipline of fear, and pioneer indus- 
1 "America and the New Epoch," p. 51, 



26 Economic Expression of Instincts 

trial managers are undoubtedly trying gradually to reduce 
the fear element in discipline to safer levels and to sub- 
stitute appeals to other human instincts, such as construc- 
tiveness or self-expression. 

Pugnacity and Rivalry 

James remarks: "Fear is a reaction aroused by the same 
objects that arouse ferocity. We both fear and wish to 
kill anything that may kill us. " ^ In the presence of danger 
a man may seek safety by flight, or he may squarely fight 
the danger off. The frightened animal, when the chase 
has brought it to bay, will turn and fight madly for its 
life. To flee or to fight is the pair of alternatives. The 
manufacturer whose existence is threatened by a trust or 
monopoly may sell out or retire, or he may devote his whole 
energy to a bitter, desperate struggle to maintain his inde- 
pendence regardless of all the tactics used to crush him. 
In the latter event, as James further points out, "In many 
respects, man is the most ruthlessly ferocious of beasts." 

His fighting spirit is aroused when any of his other in- 
stincts are thwarted. To obstruct his ereativeness or self- 
assertiveness or possessiveness fires him to a belligerent 
mood. Obstacles which cross the pathway of sex, or gre- 
gariousness or submissiveness bring forth aggravation, and 
the will to brook no opposition. Balk the man in any of 
his motives, and pugnacity and anger begin to warm his 
blood. As Wallas remarks, "Obstructed sex love, for in- 
stance, normally produces a violent outbreak of Pugnac- 
ity."^ That is to say, pugnacity acts not so much as a 
separate instinct by itself, but is the reaction when any of 
the other instincts are denied an adequate expression. 

As a matter of fact, this thwarting, balking, and repress- 
ing is exactly what the economic environment accomplishes. 
In one way and another and at one time and another the 
economic environment checkmates and foils all of the great 
human motives and desires. Some of these instincts de- 
serve to be thwarted for the safety of society, but the 
thwarting of others is dehumanizing for the individual 

1 "Psychology," Vol. II, pp. 409-415. 

2 "The Great Society," p. 64. 



Economic Expression of Instincts 27 

and dangerous for the community at large. The conse- 
quence, speaking in the broadest way, is a widespread con- 
dition of antagonism, pugnacity and unrest. The repressed 
instincts produce a state of nervous tension amounting to 
hostility. Hence it happens that most wars, be they 
industrial or international, are struggles for freedom, i.e., 
struggles to remove the obstruction, to hurl aside the thwart- 
ing force, to throw off the repressing environment. Pug- 
nacity and anger strive to hew and slash their way through 
to escape and liberty. 

For example, the activities of unions thwart the self- 
assertive dispositions of employers and, angered by such 
opposition, employers decide it is time to "go to the mat" 
with labor and fight it out. Vice versa, the orders and man- 
dates of an autocratic employer may so cross the self-assert- 
ive spirit of his workers that, furious at his domineering 
policies, they will walk out on a strike which requires grim 
and enduring pugnacity. So the man intimidated from 
joining a union by the likelihood of losing his job is in no 
peaceful frame of mind; and the business man who finds 
his chance to reap a fine profit blocked by the cunning of 
a rival, nurses his aroused pugnacity by the planning 
of sweet revenge. The instinct of constructiveness, when 
balked by the installation of automatic machinery, sets the 
worker on edge with hostility and he looks upon himself 
as an "iron slave" to the machine. Unrest saturates the 
economic world, — arising from a maelstrom of stifled de- 
sires and subdued motives. 

In spite of all theories of partnership and good will, 
there remains all too great an abundance of antagonism 
and warlikeness in the economic arena, and will remain 
until the economic environment calls forth a more bal- 
anced and healthy expression of the instincts which when 
balked are potent with pugnacity. There is no more fun- 
damental law in all economics than the law that antagonism 
may be alleviated not by attempting to abolish the pug- 
nacious instinct but by providing wholesome expression 
for all the great instincts of the human being. 

Intimately allied with the pugnacious feeling is the 



28 Economic Expression of Instincts 

spirit of rivalry. Keen competition between business rivals, 
intense effort to win promotion, determination to excel one's 
fellows, whether employers or employees, are forms of pug- 
nacious energy turned in the direction of useful rivalry. 
These forms of rivalry furnish a civilized outlet for much 
of man's warlike energies, and sustain in large measure 
the vigor and hardihood of economic endeavor. 

Some Instincts of Minor Economic Significance 

Hunting, housing, migration and play are human ten- 
dencies which, although not as important as others that 
have been considered in shaping economic conduct, are 
nevertheless influential in many lines of endeavor. 

Hunting 

Parmelee observes: "Indeed it has become true in our 
modern civilized society that some impulses now find their 
expression for most individuals only in the form of play. 
For example, few people to-day need to hunt for purposes of 
securing subsistence .... but many indulge in hunting 
for purposes of play. ' '^ 

But the most important diversion of this instinct, which 
in his early history kept man from starvation and death, 
is pointed out by Thorndike as follows : * ' The older indulge 
the propensity at great cost of time and money in hunting 
beasts, or at still greater cost of manhood in hounding 
Quakers, abolitionists, Jews, Chinamen, scabs, prophets, 
or suffragettes of the non-militant variety. Teasing, bully- 
ing, cruelty, are thus in part the result of one of nature's 
means of providing self and family with food: and what 
grew up as a pillar of human support has become so ex- 
travagant a luxury as to be almost a vice. ' ' ^ The popular 
pastime of ' ' heresy hunting ' ' is one of the more recent reve- 
lations of the impulse. Hunting down union agitators by a 
force of detectives and spies has appealed to a considerable 
number of business leaders. The hunting instinct, merged 
with the instinct of pugnacity and rivalry, led men into the 

1 "Science of Human Behavior," p. 250. 

2 "Original Nature of Man," p. 53. 



Economic Eoopression of Instincts 29 

struggles of cut-throat competition with such primordial 
intensity that it became necessary to place drastic limita- 
tion upon the code of hunting and fighting practices in the 
form of a long catalogue of forms of ''unfair competition." 
Raiding the Reds, ferreting out the socialists, hounding the 
pacifists, and stalking the "scabs," are all modern twists 
given to the original hunting impulse. Just as the fruits 
of the parental instinct were seen to be for the most part 
social comfort, kindness, and progress, so, in contrast, the 
fruits of the hunting instinct in modem economic life are 
in the nature of social torments, harryings and persecutions. 

The Homing Instinct 

The problem of high rents, of housing workers, of build- 
ing new homes arises not merely from the necessity of 
protection from climate and the elements but from a true 
instinct of shelter and habitation. This has been admirably 
described by James as follows, ' ' There can be no doubt that 
the instinct to seek a sheltered nook, open only on one side, 
into which he may retire and be safe, is in man quite as 
specific as the instinct of birds to build a nest. . . . The 
first habitations were eaves and leafy grottoes, bettered by 
the hands : and we see children to-day, when playing in wild 
places, take the greatest delight in discovering and appro- 
priating such retreats and 'playing house' there. "^ The 
'economic system to-day finds it difficult to serve this in- 
stinct adequately, — for example, it is estimated that there 
is an urgent need for fully a million new homes. How to 
catch up in the national building program is an urgent 
economic problem, and it is being pressed for solution by 
the deep human impulse to have a suitable cover and retreat 
for social and physical comfort. 

The Instinct of Migration 

Under conditions favorable to the exercise of the impulse, 

many men take delight in continually moving from place 

to place. Habits, customs, traditions, bonds of a thousand 

sorts to the local community are of no avail against the 

1 "Psychology," Vol. I, p. 400. 



au Miconomtc Hj oppression oj instincts 

"roving" disposition. Many of the serious problems of 
labor turnover consist in finding strong means of satisfy- 
ing impulses related to adventuresomeness. The laborer 
■who is here two weeks, a hundred miles farther on the 
next two weeks, and so on, usually is acting under an effec- 
tive stimulus to his instinctive wanderlust. A close connec- 
tion exists between this love of being on the go and a delight 
in the physical and mental activity called forth by ever 
new and curiosity-provoking experiences. Exploration 
satisfies curiosity. The appetite for newness inspires rest- 
lessness. Many an employer chafes at the experience of 
remaining in one line of business long at a time; he seeks 
new business fields to explore. Millions of employees each 
year change their jobs under the spell of what may lie 
beyond, — a process which, as will be pointed out more fully 
in a later chapter, entails a heavy waste and disruption in 
the economic organization. 

The Instinct of Play 

Play, in the form of games, amusement, entertainments, 
exercise, motoring, etc., is the business man's method of 
recreating his nervous force from day to day, and main- 
taining a state of bodily and mental vigor. Personal efii- 
ciency, clearness of mind, and the power to see hard business 
ventures through without suffering a nervous breakdown, — 
all depend upon whether the individual has discovered the 
art of relaxing his jaded nerves, and of draining the fatigue 
products out of his system by the proper amount of play 
and recreation. 

The most effective forms of play are undoubtedly those 
which involve considerable bodily activity and a real degree 
of skill. Baseball, golf, tennis, football, etc., have the 
maximum recreational value. But with the advancing com- 
plications of the economic system, great diffteulties to di- 
rect participation by everybody in such sports have arisen. 
The modern man has to enjoy his sport largely from the 
grandstand and the bleachers as an excited onlooker, and 
probably he enjoys himself more from the thrills of the 
crowd spirit, from the high pitches of the mob emotion, 



Economic Expression of Instincts 31 

than from the mere sportsmanship of the play itself. The 
j'eereational value of this sort of play has obvious limita- 
tions. 

The need of the worker for recreation is no less impera- 
tive. However, he finds participation directly in the skilled 
sports practically impossible. He becomes an onlooker, 
and takes his play by proxy. Often he seeks relief from the 
tedium of his life through thoroughly unwholesome ex- 
pedients. ''Drinking and the new sedative pleasures of 
smoking and saloon card-games are the vices of a faulty 
economic system. . . . They are irrational and extravagant, 
for they sate appetite and deaden acute pain, without re- 
newing force or directing vigor toward the days work."^ 
Men crowd to amusement parks, beaches, lakes, etc., for the 
sake of the shute-the-shute, or the ocean wave, or the scenic 
railway. 

Patten explains, *'We experience a bodily refreshment, 
a brightening of blood and tissue, as we watch the supple- 
ness of a dancer, the posturing of acrobats, and the beautiful 
delicacies of wire walkers. We are attracted by danger, 
and the unguarded trapeze yields us a pleasant qualm. 
We enjoy the mock perils of the scenic railway and the 
real risks of the popular 'loops' and 'chutes,' and say 
that they have given us new sensations that are, in fact, 
as old as society itself. . . . Amusement is stronger than 
vice and can stifle the lust of it. It is a base of economic 
efficiency upon which depends the progress of multitudes." ^ 
Pioneer corporations, being farsighted enough to perceive 
these economic bearings of play, are utilizing regular va- 
cations for their employees, are conceding more time for 
leisure aftei working hours, are installing company moving 
pictures, glee clubs, orchestras, baseball teams, etc. Play 
can serve to eliminate much friction and many ugly moods, 
to improve the tone of the factory morale, and to put the 
life of both employer and employee on a higher plane of 
economic efficiency.^ 

1 S. N. Patten, "The New Basis of Civilization," p. 123. 
ziUd., pp. 135-143. 
^8 See G. T. W, Patrick, "Psychology of Relaxation,'* especis^lly 



32 Economic Expression of Instincts 

Disposition to Mental Activity 

' ' May we not complete the list by adding the instincts of 
thought, reason, intelligence?"^ writes C. S. Myers and 
again states : ' ' There is not one nervous apparatus for in- 
stinct and another for intelligence. We ought to speak not 
of instinct and intelligence, but of instinct-intelligence, 
treating the two as one indivisible mental function. ' '^ The 
economic man is not a purely rational creature, with the 
power of detached and aloof thought utterly free from any 
instinctive drive; on the contrary, when he thinks most, 
then are most operative in him the energies of an innate 
disposition to curiosity and creativeness of the mind. So 
Wallas has argued that ' ' Thought is a true natural disposi- 
tion. Under appropriate conditions, that is to say, we are 
naturally disposed to enter into a state of reverie, during 
which our ideas are so combined and arranged as to produce 
new mental results."^ And Thomdike emphasizes, "In- 
tellect is of the same flesh and blood with all the instincts, 
a brother whose superiority lies in his power to appreciate, 
harmonize, use and save them all. * '* The remark of James 
Harvey Robinson is significant, "A creature which lacked 
curiosity and had no tendency to fumble could never have 
developed civilization and human intelligence. " ^ 

The economic student must come to look upon his fellow- 
men engaged in all the different activities of making and 
spending money not as pure rationalists calculating ways 
and means for overcoming instincts and emotions, but as 
men who are expressing all their instincts in greatly vary- 
ing degrees and with all sorts of intensities. To think is 
not to combat or mortify instinct, but is to give vent to the 
highest and most useful forms of instinctive energy which 
human nature is heir to. 

Moreover all of the other instincts tend to set in 
motion the intellectual energies. The engineers who un- 

1 British Journal of Psychology, III, 215, 

2 Hid., Ill, 267. 

3 "The Great Society," p. 176. 

4 "Original Nature of Man," p. 310. 
'^Earper's, Sept., 1920, p. 489, 



Economic Expression ef Instincts 33 

der the urge of the instinct of constructiveness set about 
the erection of a railroad bridge across Great Salt Lake 
found a delight in the scientific investigations and ex- 
periments and the mental concentration on ways and 
means of securing stable foundations in spite of the lake 
muds. The instinct of pugnacity gives rise to intense 
thought on the strategy for winning a strike. The self- 
assertive captain of industry is given to constant de- 
liberations on how to realize his power. And so each of 
the instincts serves to set off the energies of the mental 
organism, and to provoke severe, prolonged, profound 
thought. 

As a consequence of this intimate relation between 
thought and all the other dispositions, it occurs that 
thought is continually influenced, shaped, and often dom- 
inated by each and all of the tendencies of human na- 
ture. The public-spirited bank president thinks in terms 
of social responsibility, whereas the profiteering president 
thinks exclusively in terms of private gain. The worker 
subject to the spell of economic fears thinks in terms of 
a class philosophy which promises to alleviate his fears. 
In general, those opinions of which we are surest are the 
ones which are most dominated by the instincts. To quote 
Trotter, "As a matter of fact, it is just those fundamental 
propositions which owe their origin to instinct which ap- 
pear to the subject the most obvious, the most axiomatic, 
and the least liable to doubt by any one but an eccentric or 
a mad man. When, therefore, we find ourselves enter- 
taining an opinion about the basis of which there is a 
quality of feeling which tells us that to inquire into it 
would be absurd, obviously unnecessary, unprofitable, un- 
desirable, bad form, or wicked, we may know that opinion 
is a non-rational one, and probably, therefore, founded 
upon inadequate evidence. " ^ In other words, just when we 
feel most certain of our opinion, we are apt to be most 
the victim of our instinctive nature. 

Among opinions carrying this feeling of certitude are 
those common convictions about the divine right to strike, 

1 Ti'otter, "Instincts of the Herd in Peace and War," pp. 44, 96. 



34 Economic Expression of Instincts 

or the rights of private property, or the so-called * * Ameri- 
can" or open shop, or the doctrines of economic radicalism, 
or conceptions of freedom of contract, or of the sanctity of 
the courts, and so on. About these matters most people 
have settled and emphatic opinions, and any question about 
them is a question about something, to quote James, ' ' need- 
ing no proof but its own evidence." And James further 
explains, "And we may conclude that to the animal which 
obeys it, every impulse and every step of every instinct 
shines with its own sufficient light, and seems at the mo- 
ment the only eternally right and proper thing to do. " ^ 
Consequently, our convictions about economic fundamen- 
tals ought not to be treated as if they were uniformly 
the outcome of uninfluenced rationalism, but should be 
recognized for the instinctive products which in so large a 
degree they really are. The play of economic forces makes 
for a constant flux and evolution in the economic organ- 
ization, all of which creates in many and diverse ways a 
new status for property, a new status for labor, and a 
new status for consumers generally. Each alteration of 
status requires changed opinions and new forms of thought. 
Because so many of the old convictions are primarily in- 
stinctive, it is extremely difficult for men deliberately and 
rationally to adapt their minds swiftly enough to fthe 
new facts of the economic environment. Instinctive opin- 
ion, engendered as it is in large degree by the suggestibility 
of the herd and fixed as it is by mental habit, finds great 
difficulty in making adjustments to new inventions, new 
industrial relations, new economic facts. 

But this is only one-half of the story, for just as truly 
does thought in turn influence and control the impulses 
struggling for release. Every time that sex, pugnacity, 
fear, kindliness and the other tendencies find expression, 
the experience takes on a more or less intelligent sig- 
nificance, and by the gradual exercise and growth of all 
the dispositions, experience builds up an accumulation of 
ideas, solutions, convictions and thoughts which stand 
ready thereafter to guide the instincts. So Parmelee finds, 
1 James, "Psychology," Vol II, 387. 



Economic Expression of Instincts 35 

"Intelligent behavior is therefore made up of tropic, re- 
flex, and instinctive actions which have been confined in 
new ways as a result of experience so as to constitute new 
forms of behavior. ' ' ^ More explicitly, Dewey shows that 
"Intellect ... is the sum total of impulses, habits, emo- 
tions, records and discoveries which forecast what is de- 
sirable and undesirable in future possibilities, and which 
contrive ingeniously in behalf of imagined good. Faith in 
the power of intelligence to imagine a future which is the 
projection of the desirable in the present, and to invent 
the instrumentalities of its realization, is our salvation. ' ' ^ 

In no part of the life of society do the non-rational pas- 
sions of men threaten the harmony and efficiency that is 
desirable more than in the economic sphere. Rivalries, 
class consciousness, cut-throat competition, depression and 
prosperity, these and a hundred other common features of 
the economic order reveal instinct which has not come 
properly under the control of this power "to contrive in- 
geniously in behalf of imagined good." In fact, a non- 
intelligent control of sex leads to vice, of possessiveness 
leads to profiteering, of kindliness leads to bankruptcy, of 
pugnacity leads to war, of self-assertiveness leads to 
autocracy, of submissiveness leads to pacifism, of hunting 
leads to cruelty. "Thought," says Dewey, "affords the 
sole method of escape from purely impulsive or purely 
routine action, A being without capacity for thought is 
moved only by instincts and appetites, as these are called 
forth by outward conditions and by the inner state of the 
organism. ' ' ^ And he adds, referring to instinctive ten- 
dencies, "Most of them are of little use till they are in- 
telligently combined and directed." 

The controversy between those who maintain that man 
is almost wholly rational and those who maintain him to 
be an irrational animal seldom leads to useful conclusions. 
In the economic world, high instinctive energy gives in- 
itiative, ambition, aggressiveness, determination, success, 

1 Parmelee, "Science of Human Behavior," p. 258. 

2 Dewey, "Creative Intelligence," p. 69. 

3 Dewey, "How We Think," p. 15. 



36 Economic Expression of Instincts 

and these harnessed by keen intellectual guidance, make 
for economic success. It would of course be an untrue 
claim that the unsuccessful groups in industry and com- 
merce are always the irrational ones, and that the success- 
ful groups are always most plentifully endowed with 
powers of reason. Success usually indicates high intelli- 
gence along some specific line, such as engineering or 
finance. The same brainy engineer may be a most irra- 
tional being in his dealings with labor, in his notions of 
property rights, and in his whole economic philosophy. 
And the uncanny financial genius may hold convictions 
about democracy which are blindly impulsive and would 
not stand cool rational analysis for a minute. Business 
has come to be so completely a matter of applied science 
and technical organization that none but the quick and 
efficient of mind can hope to play a leading part in it. 
Successful groups indicate a superior intelligence in 
handling technical problems, but may just as commonly 
indicate blind instinctive fumbling in all the more social 
problems arising from economic activity. 

Executives everywhere complain of the scarcity of lead- 
ers who can handle large groups of men effectively. When 
the successful man has to handle impulses, instincts, moods, 
prejudices and emotions in the mass, he is playing with 
fire. It is difficult for him to be patient, to size up human 
nature, to enthuse and inspire, to create morale, to secure 
loyalty, to settle differences. These problems tend to in- 
flame instinctive opinions in his own mind, and are the 
most aggravating materials to handle in a calm, intelligent 
fashion. Leaders of labor unions as well as managers of 
workers on the executive staff of the corporation face here 
a most provoking problem. It is the center of most of 
the irrationalities of the industrial world. 

As a matter of careful observation, therefore, it would 
appear to be a fair conclusion that economic success, and 
intelligence along technical lines, go hand in hand. But 
this observation would be a futile one if side by side with 
it were not placed the equally important observation that 
such successful men may be dominated in many of their 



Economic Expression of Instincts 37 

fields of interest by the clearest kind of instinctive irra- 
tionality. Management has its incompetency and irration- 
ality no less than labor, and it is a question later to be 
considered whether a large part of the incompetencies of 
labor are not due to the fact that management has allowed 
itself to defend policies from blindly instinctive motives 
rather than from impartial analysis of the economic situa- 
tion. 

There is one field of intelligence which has been de- 
veloping mightily of late years and which holds out the 
promise of a more intelligent treatment of economic 
questions on everybody's part, — that is, applied and ab- 
stract science. Scientific management, efficiency, physi- 
cal and chemical research, industrial laboratories, psycho- 
logical experimentation, — all these are being brought to 
bear scientifically upon the harassing problems of the times. 
Of profound significance was the recent statement by the 
President of the American Institute of Electrical Engi- 
neers, "What is true of the electrical art is also true of 
all the other arts and applied sciences. They are all based 
upon fundamental discoveries made by workers in pure 
science who were seeking only to discover the laws of 
nature and extend the realm of human Knowledge."^ 

And of greater hope for the future in the control of 
scientific thought over groping instinct is the situation 
described by the President of the American Psychological 
Association in 1919 as follows: 

''It has been estimated that during the nineteenth cen- 
tury the power of the human race to produce food, cloth- 
ing and shelter was doubled by the application of increased 
knowledge to the material elements of the universe. All 
the significant advances in knowledge of the material 
world were brought about by possibly a few thousand 
progressive minds devoted to that study. ... It is quite 
probable that the productive power of the human race 
is being doubled again during the present century. . . . 
Such an increase in the efficiency of the race will probably 
be due to the advance in our knowledge of personnel rather 
lYerkes' "New World of Science," p. xiii. 



38 Econormc Expression of Instincts 

than to further increase in our knowledge of the material 
universe." In short, the economic order is able to go 
through another drastic transformation because it happily 
possesses a number of minds animated by intense instinc- 
tive energy, working out along scientific lines. The instinct 
of thought is pushing the whole thing along. 



CHAPTER III 

THE ORGANIZATION OF HUMAN NATURE 

The great fact of human nature is not separated, un- 
connected tendencies but the whole man, — all of the origi- 
nal tendencies organized into a grand total, a unity. The 
instincts are not single, separated, isolated strands; they 
are integrated into a solid, organic whole. 

It has been necessary for purposes of description and 
analysis to take up different dispositions one by one. There 
is danger that this unavoidable method of presentation 
will give the impression that the dispositions can be over- 
simplified. Nothing could be further from the intent of 
the account; nothing could be further from the truth. 
As Thorndike has most emphatically urged, "The original 
tendencies of man, however, rarely act one at a time in iso- 
lation from one another. . . . On the contrary they coop- 
erate in multitudinous combinations. . . . Original nature 
is not a set of perfectly independent mechanisms any more 
than it is a hodge-podge for chance. It is a factory or 
hierarchy of mechanisms, with very many components, of 
which many cooperate in response to any one situation."^ 

For example, a banker decides to organize a syndicate to 
finance a $100,000,000 corporation. His motives are 
a complex organization of, say, a desire for gain, a desire 
for power, a creative imagination, a spirit of rivalry, a 
sense of public responsibility. The whole genius of the 
captain of finance is evoked and all the motive powers of 
all his dispositions become welded together in establish- 
ing the new corporation on a solid financial foundation. 
This unifying process of mind is aptly described by 
McDougall when he writes, "The various instincts become 
organized in systems, and, with the development of self- 
1 Thorndike, "Original Nature of Man," pp. 10, 196. 



40 The Organization of Human Nature 

consciousness, all these become organized and duly subor- 
dinated within the one all-comprehensive system which is 
the character of the individual man." 

The "economic man" is this blended, integrated, or- 
ganized array of original human tendencies. He is not an 
oversimplified helter-skelter of nicely separated tendencies 
but the whole man so well described by Angell in the fol- 
lowing words, ''Instincts .... are the basic activities of 
mind .... In a general way it may be said that all the 
common and persistent human interests, all the funda- 
mental forms of human desire, all the more profound types 
of human emotions are based upon the life of instinct. . . . 
However divergent, then, the sources from which oujr 
native impulses flow, modern psychology teaches without 
reservation that our volitional life, our conduct and our 
character are built up around these factors as a center. ' ' ^ 

And yet, even though the economic man be so complex 
and multitudinous a composite of tendencies, we need 
not feel thwarted and confounded in attempting to under- 
stand his economic behavior. The truth of the matter is 
that the study of this instinctive nature of man gives the 
very key to economic behavior which best fits the problem. 
For in and through the unified group there run commonly 
certain master impulses which predominate, and these 
guide the economic conduct of the life. These ruling pas- 
sions deserve to rivet the attention of the student of econo- 
mic behavior^ for they are the best clues to predicting and 
controlling human nature in the economic field. As ob- 
served by Woodworth, * ' Some tendencies and interests are 
stronger than others in the individual, and a well-integrat- 
ed personality is organized about its master motives, these 
acting as selective agencies with respect to other ten- 
dencies."^ 

Instead of the fictitious banker assumed above, a real 
case may well be taken for purposes of illustration, Mr. 
Harriman, the railroad banker and builder. In him the 
master impulses were love of power and of constructive 

1 Angell, "Chapters from Modern Psychology," p. 28. 
8 Waodworth, "Dynamic Psychology," p. 126. 



The Organization of Human Nature 41 

achievement. When some of his associates implored him 
to be more diplomatic and gentle, and less forceful and 
combative in carrying out his ruling impulses, his answer 
was: 

"You may be right that these things could be so accom- 
plished, but not by me. I can work only in my own way. I 
cannot make myself different, nor act in a way foreign to 
me. They will have to take me as I am, or drop me. 
This is not arrogance on my part. I simply cannot achieve 
anything if I try to compromise with my nature and to 
follow the notions of others."^ 

By what method then are these driving forces of human 
nature organized into an integrated whole? By what 
process does the fusion and blending take place ? How are 
the multitudinous combinations made into the sum and 
substance of the character and personality of the economic 
man? 

The answer is to be found in observation of the forms 
which instinct expression takes. Each of the specific in- 
stincts tends to find expression along certain well recog- 
nized lines. Each instinct does not fly off into wild, 
haphazard, totally unpredictable expressions. It tends on 
the contrary to work out along fairly uniform, general 
lines. Each specific instinct has general tendencies which 
determine how it shall work into the whole fabric of char- 
acter. These general directions and tendencies of the 
specific instincts may be called : habit, imitation, sympathy, 
and suggestion. 

Habit 

From the moment the infant first grasps for playthings, 
through the stage when the boy hoards marbles, down to 
the days of the acquisitive real estate dealer who gets pos- 
session of a thousand city lots, the instinct of possession is 
settling into habitual modes of expression. All of the 
instincts tend to find habitual forms of outlet. The thou- 
sand and one little details of everyday life and the mighty 
concepts of industrial strategy all serve to organize the 
iKahn, "Our Economic and other Problems," pp. 1-22. 



42 The Organization of Human Nature 

instincts along certain fairly definite channels. In Thorn- 
dike's words, *'In the last resort all habits are formed in 
the service of instincts, and the great majority of human 
instincts function by being modified through training."^ 

Those experiences which show a smooth working out of 
the instinctive energies, which bring a sense of satisfaction 
to the individual, which indicate that a particular form of 
expression of the instincts actually serves and fits life, — 
those experiences are the ones which tend to be conserved 
in the character of the ir dividual. Under a similar emer- 
gency next time, the same instinct will tend to work out 
along the same channels. "It is undoubtedly the tendency 
of all living organisms to perform an action more easily 
on repetition. After this ease has been gained, the act 
is spoken of as a habit. ' '^ 

Moreover, once the channel has become fairly well fixed 
and ingrained, the conscious mind will not thereafter have 
to direct the right expression. Automatically, habitually, 
unthinkingly, the human nature will take care of itself.- 
The instincts will function quietly and serviceably of their 
own accord, and the thinking mind will be freed from the 
necessity of deciding each trivial movement and response 
in the daily round of duties. The thinking mind will be 
freed to concentrate upon those higher, more enormous, 
more far-reaching problems which require constant origi- 
nality for their solution. Thus human nature comes to 
be in a large degree a bundle of habits formed in the service 
of a bundle of instincts. 

Habit, therefore, tends to bring about a degree of uni- 
formity and sameness in human nature. It tends to bring 
about settled and stable modes of business. In McDou- 
gall's words, "In short, the formation of habits by the 
individuals of each generation is an essential condition of 
the perpetuation of custom, and custom is the principal 
condition of all social organization."^ So habit facilitates 
the established process of economics, and serves to link 

1 Thorndike, "Original Nature of Man," p, 198. 

2 Parmelee, "Science of Human Behavior," p. 254. 
sMcDougall, "Social Psychology," p. 355. 



The Organization of Human Nature 43 

the instincts in stabilized and settled ways to the methods 
of the economic order. The instincts of curiosity and 
thought fall under the regime of habit and we become 
accustomed to think along fixed and stable lines. The more 
securely thought becomes thus habitualized, the more diffi- 
cult become change, progress, and improvement in eco- 
nomic processes. In the field of thought, therefore, habit 
makes for a defense of things as they are. In organizing 
man's instinctive nature, habit becomes the ally of the 
status quo and the foe of whatever is new and different. 
So James remarks, "Habit is thus the enormous flywheel 
of society, its most precious conservative agent." New 
economic processes, new economic ideas, new economic in- 
stitutions involve not only the breaking of old habits, but 
the laborious and difficult task of forming new ones in 
their place. 

Imitation, Sympathy, Suggestion 

Imitation, sympathy and suggestion are three different, 
yet related, phases of instinctive response. Imitation re- 
fers particularly to the tendency to copy actions of a social 
group; sympathy, to the tendency to experience the emo- 
tions of the group; suggestion, to the tendency to accept 
without criticism the ideas and opinions of the group. Each 
of the instincts, in seeking expression, tends to follow 
along the lines of behavioristic, emotional and intellectual 
unity of the group. With due allowance for individuality, 
originality and independence of character, these tenden- 
cies to act as others act, feel as others feel and believe 
as others believe serve to organize the several instinctive 
energies into a social whole which is fairly normal, typical 
and standard. 

Owing to their natural imitativeness, men can accept 
and assimilate the economic practices and customs of their 
day and age, and behave toward the economic environment 
with a high degree of sameness. As Parmelee points out, 
*' Imitation causes uniformity of behavior and concerted 
action, and is therefore an important force for association. 
It is an effective mode of transmitting habits and other 



44 The Organization of Human Nature 

ways of doing things from one generation to another."* 
Hence imitation, like habit, serves to mould the instincts 
into a support of the established economic order of things. 
It thereby insures that the status quo in economic life shall 
die hard and innovation come slow. But it is equally true 
that imitation may be made the ally of economic progress. 
McDougall well says, "It is only by imitation that any 
improvement conceived by any mind endowed with that 
rarest of all things, a spark of originality, can become em- 
bodied in the tradition of his society. ' '^ 'The rank and file 
of business men adopt new inventions by gradual imi- 
tation of a certain few adventuresome pioneers who first 
try the inventions out and prove them to be a success. 
The masses learn the virtue of thrift when they observe 
certain leaders who command great prestige setting the 
good example. New practices become established by get- 
ting a few prominent authorities and leaders to champion 
them; the rank and file imitate. In brief, although imita- 
tion commonly plays a conservative role in the economic 
order, it nevertheless is potentially a fundamental force 
for economic progress. 

The tendency of sympathy to organize the emotional 
phase of response is clearly stated- by Woodworth, **"What 
is certainly true ... is that we have a liking to have 
others feel as we do and to feel as others do."^ Economic 
life teems with vivid emotions of fear, anger, elation, de- 
pression, tenderness, admiration, anxiety, jealousy, — ^tho 
emotions of our companions and contemporaries, our own 
emotions, at times ours because theirs, at times theirs be- 
cause ours. The craving on the part of the corporation 
president for loyalty among his working staff is a craving 
for emotional solidarity. The yearning on the part of ag- 
grieved laborers to get the whole labor force aroused over 
their fear or hatred is a yearning to share their emotions 
with their crowd. The feeling among all sorts of economic 
groups that "We must stick together" is the result of this 

1 Parmelee, "Science of Human Behavior," p. 407. 

2 McDougall, "Social Psychology," p. 335. 

3 Woodworth, "Dynamic Psychology," p. 189. 



The Organization of Human Nature 45 

"internal process which," according to McDougall, "leads 
to the stimulation in one person of an emotion already ex- 
perienced by another." Broadly speaking, this sympathe- 
tic tendency does not make either for organized conserva- 
tive or progressive results, so much as for unity of feeling, 
solidarity of spirit, group morale in whatever economic cir- 
cle or faction or clique happens to be involved. 

Suggestion is a tendency to accept opinions which 
are generally held by one's fellowmen. Trotter speaks 
of suggestion as "the desire for identification with the 
herd in matters of opinion. In the individual mind 
there will be an unanalysable dislike of the novel in action 
or thought. It will be 'wrong,' 'wicked,' 'foolish,' 'un- 
desirable,' or as we say 'bad form.' ..." Accordingly 
trains of thought set up by almost any stimulus lead into 
fields of opinion which the best authorities accept, which 
a financial expert or a labor leader approve of, which a 
great scientist expounds, and a ready suggestibility in the 
minds of the masses of people brings a quick and natural 
wide-spread adoption of the orthodox opinion. A sub- 
stantial proportion of the convictions firmly held by the 
average man are thus built up without the process of rea- 
soning or logic. It is enough that the opinions are popu- 
lar, or held by a leader who has his confidence. The 
fundamental ideas about freedom of contract, economic 
rights, advantages of socialism or capitalism are built up 
«,mong the general run of common folk by this tendency to 
■accept the suggestion of the herd to which they belong. 
Just as the sympathetic tendency serves to organize a 
unity of feeling in economic groups, so the suggestive ten- 
dency serves to organize human nature around a unity of 
thought and conviction. 

With habit playing a conservative role, and imitation 
potentially either conservative or progressive, and sympa- 
thy and suggestibility making for unity in feeling and 
thought, it will be obvious that these four factors exercise 
a major influence in organizing all of the dispositions into 
human nature and human behavior. Emphasis then is 
rightly placed upon the compounding and combining of 



46 The Organization of Human Nature 

the several dispositions, rather than upon their isolation 
and exclusiveness. 

In this upbuilding of character, the organization of 
instincts, emotions, impulses and ideas into the finished 
product of human nature is the work of experience. The 
particular form of combination in each individual is 
conditioned by his original nature plus nurture. The 
original tendencies are given by heredity, and all sub- 
sequent modification is acquired in the life of the indi- 
vidual. This process of modification tends to attach the 
several primary forces of human nature to certain objects, 
institutions, personal titles, and causes in the outside world. 
In consequence, whenever the outside factor is present as 
a stimulus, or when the memory or idea of it is brought 
to mind, it tends to call into force the corresponding group 
of instincts, emotions, habits, etc., which have been built 
up by experience around it. 

So a worker becomes attached to a particular machine 
which he has operated for thirty years, and this machine 
stands for a vast background of industrial episodes and 
experiences. Another worker has skill in a particular 
branch of building, and this skill as practised for a life- 
time is the central organizing feature of his eco- 
nomic experiences. Another worker has spent his best 
days striving to install a union in his plant, and this labor 
cause becomes the systematizing force in his mental equip- 
ment. A financier finds that his profession of banking has 
correlated and unified a vast collection of experiences 
about itself as a center. 

But it is not to be intimated in the least that all such 
organization takes place about a single object or cause. 
Each individual has a number of environmental factors 
which are pivotal for his character formation. The finan- 
cier will find certain moods and wishes flocking to his mind 
at the mention of the word, socialist ; another group at the 
mention of the words, labor union; another group at the 
mention of the name of a great rival financier. In each 
individual character, these outside factors will connote 
great chunks of experience. Stimulated by them, the man 



The Organization of Human Nature ^7 

will feel a certain series of emotions or compound emotions 
made up from a scattered mass; he will feel certain ten- 
dencies to action; he wiU be wishing that he could cope 
with each pivotal object in certain instinctive ways; he 
will find certain ideas, opinions, beliefs, hovering around 
the particular suggestion which the object offers. Some of 
these pivotal groupings will be of greater, some of lesser 
importance. But all serve to occupy their due relative 
importance in organizing the hates and fears and hopes 
and loves and convictions of the man into a completed 
whole. 

The personality of the man becomes branded by the out- 
standing interests which he thus acquires by experience. 
The man becomes a great ' * Eoosevelt-man, " or is marked 
by the influence of some financial magnate, corporation 
executive, reform leader, or labor chief. He becomes a 
peculiar type of captain of industry or industrial engineer. 
He becomes a liberal, a conservative, or a radical. He 
is stamped with certain characteristic qualities, modes 
of behavior, emotional responses. In short, there become 
certain strategic centers in his human nature about which 
all his mental possessions are organized. ' These centers 
correspond to certain features of his environment, econo- 
mic or otherwise, and the key to the man's character lies 
there. Such strategic centers vary greatly. They may be 
an occupation, an institution, a profession, a machine, a 
personality, a great cause, a political party. When groups 
of men come to develop among themselves similar interests, 
with a common strategic center for their instincts, emotions 
and thoughts, they become a nation and the name of their 
country becomes the rallying point for their human nature ; 
or they become a class and the name of their class is the 
hub of the psychological wheel, or they become the human 
part of an institution and the name of the institution 
serves to bring about the concentrations of their life ex- 
perience. Thus the organization of human nature is a 
biological process in which the inner nature, and the out- 
side object acting as stimulus, cooperate to create the 
finished product of the human personality. 



48 The Orgamzation of Human Nature 

This conception of economic psychology puts man at 
the center of economics. It is dynamic in its outlook and 
conceives economics as a human or social science. It 
views man not as an inert, indifferent mass, nor yet as a 
purely rational, calculating being, but as a dynamic or- 
ganism, moved by inherited instinctive tendencies, ener- 
gized from within, with innate dispositions to create new 
things by the work of his hands, to assert his powers among 
his fellowmen, to acquire some portion of the wealth of the 
community, to render some service to his community, to 
be curious and thoughtful about perplexing problems, to 
express at one time and another and in one way and an- 
other his original instinctive nature through his economic 
environment. In a word it is a blending together of the 
inseparable sciences of dynamic psychology and social 
economics. 

Inequalities of Human Equipment 

The original equipment of instinctive tendencies and 
capacities differs very greatly between individuals. The 
dynamic drive of instincts varies in intensity from indi- 
vidual to individual, and the strength of emotions and 
impulses shows endless variations. Some men are born 
with a gift of human equipment which qualifies them for 
lives of great achievement and successful leadership; 
whereas others are born with so limited a human equip- 
ment that they are qualified to perform only the least 
difficult of tasks. At no point do these inequalities of 
human power appear in more striking extremes than in the 
instinctive tendencies to use the mental powers. The glar- 
ing inequalities of intelligence are susceptible of a fairly 
accurate degree of measurement through intelligence tests. 
It is more difficult to subject instincts, emotions and im- 
pulses to quantitative measurement, but it may safely be 
assumed that the inequalities of the other human tendencies 
and powers are no less extreme or widespread than are 
those of the tendency and power to think. 

The technique of mental measurement made its greatest 
advances during the war, in the army mental tests of the 



The Organization of Human Nature 49 

drafted personnel. Over one million, seven hundred thou- 
sand men in the army wetre put through these tests, and 
their mental levels were recorded and classified. The 
draft troops were representative of all classes and strata 
of people and it may be assumed therefore that the find- 
ings for this group represent with approximate accuracy the 
findings that would be arrived at if it were possible to 
apply the test to every individual in the country. It 
should be borne in mind, too, that intelligence tests are not 
tests of memory, or of knowledge, or of feeling, but of 
the power of the mind to think. 

The plain facts revealed by these comprehensive tests 
are briefly as follows : About 10 per cent, of the population 
of the country is of very inferior intelligence. The best 
of this group are unable to get beyond the third or fourth 
grade in school, no matter how long they attend, and the 
others are either on the border line of mental deficiency 
or are feeble-minded. Their mental level is comparable 
to that of a child of ten years or less. More striking than 
these facts are the numbers of those individuals in the 
country whose mental level is comparable to that of a 
child twelve years of age or less. Forty-five per cent, of 
the population are limited in intelligence to that level. 
Seventy per cent, of the population register an intelligence 
equivalent only to an age of fourteen years or less. At 
the top of the rating scale are a group of people of very 
superior intelligence amounting to four and one-half 
per cent, of the total population. And just below this 
grade of intelligence are a group whose mental level makes 
them average college material, am.ounting to nine per cent, 
of the population. The sharp contrast between the two 
extremes of very superior and very inferior intelligence, 
and the enormous proportion, nearly one-half, of the total 
population, showing only a very moderate intelligence, give 
a fairly definite basis for a conception of the great ine- 
qualities of intelligence. 

The upper grades of intelligence furnish the leadership 
of society. From these grades come the great statesmen, 
educators, ofiicers, lawyers, doctors and business executives. 



50 Tlie Organization of Human Nature 

To the extent that these groups of high native mentality 
are elevated to positions of power and responsibility, there 
is some assurance of efficiency in economic and social or- 
ganizations. The grossest incompetencies occur, however, 
when individuals of low mental ability have power and 
responsibility thrust upon them. Democracy requires that 
the influence of these men in the highest levels of intelli- 
gence shall be paramount, for the influence of the lower 
levels is characterized primarily by non-rational tenden- 
cies. The lowest 10 per cent, in the army were deemed 
unfit to send over seas. They are scarcely able to behave 
with the minimum of self -guidance necessary to get along 
in industry under favoriable circumstances; and under 
unfavorable circumstances, they become the glaring mis- 
fits and frequent tragedies of the industrial system. Just 
above this lowest ten per cent, is a group of fifteen per cent, 
of the population slightly but not much better off. This 
group includes many foreigners and many who are illiter- 
ate. They are weak in initiative and show very little 
resourcefulness. To get along in their jobs successfully 
they requira close supervision by men who understand 
sympathetically their limitations. The grades just above 
this level suffer from similar limitations and handicaps in 
diminishing degrees. Industry abounds with individuals 
who "cannot restrain themselves from outbursts of temper 
or xrom irrational obstinacies; with individuals who re- 
peatedly make mistakes and who require an unusual 
amount of training before they can perform their work 
habitually and well; with individuals who are unable to 
think their way out of difficulties, but who blunder and 
fumble through, at great distress to themselves and their 
families and at great waste to society. The science of per- 
sonnel administration is a serious attempt to understand 
and control the great inequalities of intelligence for the 
better comfort of the individuals and the greater efficiency 
of economic society. 

These facts indicate how misleading it is to make sweep- 
ing references to "the people" or the "masses" as if they 
were all on a dead level and all alike. Difference, not uni- 



The Organization of Human Nature 51 

formity, is the cardinal feature of the human equipment, 
and the inequalities of intelligence between various mental 
levels give the real character of the human nature which 
is of interest to economics. The inequalities of intelli- 
gence are matched by the inequalities of all the instinctive 
tendencies. The entire human equipment of each indi- 
vidual qualifies that individual to cope with a certain 
amount of responsibility and no more, and the prime 
task of economic democracy is to adapt the distribution of 
power and responsibility in economic life to the unequal 
distribution of human equipment.^ 

1 See H. H. Goddard's "Hmnan Efficiency and Levels of Intelli- 
gence," McDougall's "Is America Safe for Democracy?"; "Personnel 
System of the United States Army," 1919, Vol. I; L. W. Stern, "The 
Psychological Methods of Testing Intelligence." 



CHAPTER IV 

HimiAN ADAPTATION TO ECONOMIC ENVIRONMENT 

We are encircled by an economic environment. It is 
made up in part of pig iron, india rubber, wheat, automatic 
machines, elevators and an endless host of material things. 
It is made up in part of a technical science of molding and 
refining metals, of arranging dynamos, machines, fur- 
naces, railroads for productive purposes. It is made up 
in part of an institutional organization, involving relations 
between owners and non-owners of property, involving 
rights and duties of property or labor, involving customs, 
traditions, ideals, laws, principles. In the maelstrom of 
this environment we carry on our ** wealth getting and 
wealth using activities." Here human nature meets eco- 
nomic environment, merges with it, absorbs it, destroys 
and recreates it, or succumbs to it. "Man's impulses and 
thoughts and acts result from the impact of his nature 
upon the environment into which he is born." 

In this impact with economic surroundings, human na- 
ture undergoes a constant process of internal conflict. 
Contradictory impulses steadily appear. The man desires 
to play but decides to finish a report instead ; his desire for 
possession must compromise with calls for philanthropy; 
his family instincts must not lead to undue promotion of 
inefficient relatives; his anger toward labor leaders must 
be controlled by his calmer judgment, and this control 
is in turn affected by influences arising from his creative 
ambitions or profit motives, or his love of power. Some 
tendencies have to be eliminated altogether, some selected 
for expression, some modified or redirected. The fact of 
conflict between the great instinctive tendencies however 
is constant, and the consequences of this conflict and the 

52 



Human Adaptation to Economic Environment 53 

processes of its control introduce the next step in analyz- 
ing economic behavior. 

The outcome of the conflict is adaptation of man 's origi- 
nal nature to his economic environment. This adaptation is 
in the nature of a compromise between expression and re- 
pression of instinctive tendencies. In the economic en- 
vironment men's ambitions find the widest opportunities 
for expression. There are the great financial achievements 
of constructive genius, the huge fortunes of successful 
wealth seekers, the concentrations of economic power in the 
hands of leaders of labor or capital, the bitter wars and 
friendly rivalries of industry. The native dispositions find 
remarkable opportunity for expression in every phase of 
wealth relations. But at the same time, repression is uni- 
versal. The economic environment is stubborn in demand- 
ing that a worker shall repress all instincts which might lead 
him to run a machine in other than the one right way; or 
that a labor union shall obey an injunction restraining its 
ambitions, or that managers of corporations shall curb their 
self-assertive longings in obedience to the rules against un- 
fair competition. Thus the economic world insistently re- 
buffs a host of cravings and propensities, and obdurately re- 
quires their repression throughout society. The balance 
struck between expression and repression constitutes adapta- 
tion of human nature to economic circumstances. 

Growing out of these two phases of adaptation are two 
great schools of economic viewpoint and thought. Those 
men, whether corporation executives, labor organizers, re- 
formers or detached economic scientists, whose attention is 
glued chiefly to the splendid opportunities for economic ex- 
pression of human desires are wont to insist that if human 
desires do not harmonize with the environment, the human 
desires ought to undergo a change. To men of this outlook, 
human nature is wrong ; the system is right. Keep the sys- 
tem ; change human nature to fit the system. Men are be- 
lieved to need a new spirit of good-will, or to require a 
change of heart. The old system will work all right if only 
people will approach it in the right mood. All the normal 
and right expressions of instinct can be given in the order 



54 Human Adaptation to Economic Environment 

as it is. If the times seem out of joint, the fault is in our- 
selves. Education to a new viewpoint is thought necessary ; 
training in self-control is thought the sufficient recourse; 
anything to alter human nature. 

Simultaneously, another group of men in all ranks and 
classes of the business world rivet their observation upon the 
overbearing proportion of repressions in economic life. To 
them, the economic environment needs drastic alteration to 
the end that it may relieve human nature of its worst re- 
pressions and furnish a more generous outlet for the instinc- 
tive tendencies. The system is wrong; it outrages human 
nature. The laws affecting economic enterprise are unwise ; 
they cramp the free assertion of men's spirits. The insti- 
tution needs overhauling, customs need reforming, organiza- 
tion and process need transformation the better to give 
opportunities for human nature to express itself. If only 
an amendment to the constitution can be passed, or a new 
system of labor administration be introduced, or a new type 
of management installed, in short, if only the system can be 
altered, human nature will be freed from stifling repressions, 
and all will be well. 

The different viewpoints have each their share of service- 
ability. Their difference arises from over emphasizing one 
phase of the process of adaptation. Each over simplifies 
the problem. A sense of balance and proportion observes 
that some improvements are of one type, some of another, 
and most involve both. Human nature needs refinement, 
control, redirection; system needs constant readjustment. 
Adaptation involves an equilibrium between expression and 
repression of the instinctive tendencies. 

This process of adaptation takes place in a wide variety 
of ways. As a means of describing them in a serviceable 
and comprehensive form, the following classification will be 
followed: discipline, elimination, sublimation, rationaliza- 
tion, revolt. 

Discipline 

Discipline is a common means of adapting human nature 
to the economic task of making and spending money. The 



Human Adaptation to Economic Environment 55 

fundamental necessity for discipline is eo ably stated by 
Thomdike that he may be quoted at length: **The life 
to which original nature adapts man is probably far more 
like the life of the wolf or the ape, than like the life that 
now is, as a result of human art, habit and reasoning, per- 
petuating themselves in language, tools, buildings, books, 
and customs. . . . The original tendencies of man have 
not been right, are not right, and probably never will be 
right. By them alone few of the best wants in human life 
would have been felt, and fewer still satisfied. . . . Man 
is now as civilized, rational and humane as he is because 
man in the past has changed things into shapes more satis- 
fying, and changed parts of his own nature into traits more 
satisfying to man as a whole. Man is thus eternally alter- 
ing himself to suit himself. His nature is not right in his 
own eyes. Only one thing in it, indeed, is unreservedly 
good, the power to make it better. ' ' This mastery of original 
interests requires to * ' put the useful ones to work and guard 
against the dangerous ones. . . . The native impulses and 
cravings of man have to be tamed and enlightened by the 
customs, arts and sciences of civilized life, but every item of 
these arts and sciences was first created by forces within 
man's own nature. Instincts may be trusted to form de- 
sirable habits only under a strong social pressure whereby 
the wants of one are accommodated to the wants of all. ' ' ^ 

The economic system as it now stands has to its credit a 
high degree of success in this disciplinary control of human 
impulses. The credit system, the market system, the pro- 
duction system, the management system, the ownership sys- 
tem all operate to bring human nature under control and to 
harness the great urges of men to economic accomplishments. 
What often seems harsh and exacting in these economic 
processes is often a necessary and inescapable yielding of 
certain untamed impulses. As T. N. Carver insists, ' ' Human 
nature is, within limits, adaptable and can without harm 
adjust itself to many non-psychological conditions whenever 
there is a mechanical or economic advantage in doing so. 
. . . Shall we school and discipline ourselves into conform- 

1 Thomdike, "Original Nature of Man," pp. 280, 281, 296, 311. 



56 Human Adaptation to Economic Environment 

ity with the conditions of successful living, or shall we follow 
our own proclivities and insist that it is an unjust world 
that does not bestow success upon us? . . . The progres- 
sive parts of the world, that is, those parts where industry 
has been efficient enough, and governments liberal enough to 
permit considerable numbers of people to make a living, 
have all followed the stony road of self-discipline. . . . 
Those individuals who cannot readily discipline themselves 
or conform their behavior to the mechanical or economic 
necessities of a situation, or who suffer serious harm from 
such conformity, tend to be weeded out, while those to whom 
the self-discipline which proves to be mechanically or 
economically advantageous is easy and harmless, will tend 
to survive."^ 

This power of adaptation of human nature to the in- 
exorable and inviolable requirements of the economic order 
is fundamental in economic psychology. Human nature 
cannot be given free reign, and allowed to carouse and 
rebel and romp whithersoever "the wind listeth." For 
"the capitalistic system has evolved and survived," to quote 
John R. Commons, * ' out of experiments and in spite of con- 
tinuous protests and opposition. And, I take it, one reason 
is that it is a system of repression of natural instincts, a 
system of discipline, regimentation, submission to foremen, 
superintendents, executives, over whom the employees have 
little or no control. . . It is the business of management 
to sustain the credit system by restraining the instincts of 
labor." 2 

Elimination 

Elimination of dangerous impulses is an auxiliary to dis- 
cipline. Much of the impulsive nature behind hates, jeal- 
ousies, cruelties, persecutions, vices, fightings, stealings, 
slaveries and inertias has to be stamped out with a heavy 
hand. One form of elimination is mere atrophy through dis- 
use. The mild, docile, obedient, orderly loyal worker is 
apt to be one in whom combativeness and pugnacity have 

1 Quarterly Journal of Economics, Vol. 35, pp. 144-146. 

2 American Economic Review, Vol. 9, p. 31^. 



Human Adaptation to Economic Environment 57 

died a natural death over a period of one or two score 
years. Self-assertion may under similar lack of stimulus 
wither up and lose its force in the worker's motivation. 
Another form of elimination is to make the consequences of 
the instinctive expression so unpleasant and painful that it 
will thereby tend to be eliminated. The instinct of creative- 
ness and originality in workmanship may lead to such great 
distraction of attention from the exact operation of the ma- 
chine that the operator becomes a nuisance and loses his 
job, and thereby learns to abolish his craftsmanlike long- 
ings. The instinct of pugnacity and rivalry between busi- 
ness men may lead to such damaging results as to lead to 
combination of business units and the consequent substitu- 
tion of co-operation for cut-throat rivalry. 

The economic population is replete with characters who 
have forgotten how to play, or who have lost the parental 
tendencies, or who have mortified the love of riches, or who 
are incapable of resentment and wrath, or who have given 
up the exercise of thought, or who know not the meaning of 
human tenderness. In the process of eliminating the dan- 
gerous and harmful, it is inevitable that much which is 
valuable in character should also be cast out. But a civil- 
ized and safe economic institution of necessity strikes out 
some of the more brutish and incompatible primitive ten- 
dencies. Human nature allows thereby a wise and useful 
adaptation to economic obligation, and by permitting the 
atrophy or stifling of non-civilizable urges enables men to 
subordinate their worst nature and capitalize their best 
nature in economic endeavor. 

Sublimation 

Sublimation is a method of devoting instincts which are, 
so to speak, "loaded with dynamite" to useful ends. Instead 
of annihilating the more dangerous energies of human 
nature, we may turn them into great and good expressions. 
Freudian psychology has stressed heavily the energy of the 
sex instinct in character formation and has emphasized the 
possibilities of sublimating the sex energies in high and use- 
ful non-sexual forms. Without debating at all the extremes 



58 Human Adaptation to Economic Environment 

of many of the Freudian doctrines, we may safely accept the 
fundamental proposition that "Sexual desire relinquishes 
either its goal of partial gratification of desire, or the goal 
of desire toward reproduction, and adopts another aim, 
genetically related to the abandoned one, save that it is no 
longer sexual but must be termed social." And again 
Freud states of the sexual impulses, "They are diverted 
from their sexual goals and directed to ends socially higher 
and no longer sexual. ' ' ^ 

Parker has shown that among the few millions of casual 
and migratory laborers, fully 90% are unmarried and 
have no normal sex life ; that this sex repression contributes 
to unrest, discontent, and labor difficulties generally; and 
that the thwarted energies may find a moral equivalent 
in forms of self-expression if opportunity is provided dur- 
ing work and leisure hours.^ Ross finds that "industrial- 
ism holds apart the sexes" and that consequently the 
' ' sex instincts are needlessly thwarted or perverted. ' ' ^ 
And Lippmann's illuminating study of the Chicago Vice 
Commission Report leads to his plea to "see sex as an in- 
stinct which can be transmuted, and turned into one of the 
values of life." "What is needed is civilized means of 
* ' transmuting the sex impulse into art, into social endeavor, 
into religion." ^he full economic bearing is further sug- 
gested by Lippmann's broad proposition that, "No one 
can doubt that to abolish prostitution means to abolish the 
slum and the dirty alley, to stop overwork, underpay, the 
sweating and the torturing monotony of business, to breathe 
a new life into education, ventilate society with frankness, 
and fill life with play and art, with games, with passions 
which hold and suffuse the imagination." Psychology re- 
veals that the task of sound business statesmanship is to 
work out moral equivalents for the sex energies of the 
workers. Without such equivalent expressions, the power- 
ful sex energies are almost sure to play havoc from time 
to time with economic harmony and efficiency.* 

1 Freud, S., "Introduction to Psychoanalysis," pp. 8, 300. 

2 C. H. Parker, "The Casual Laborer," Chapters II-III. 
sEoss, E. A., "Principles of Sociology," p. 50. 

* See W, Lippitmnn, "Preface to Politics." 



Human Adaptation to Economic Environment 59 

William James has made an historic contribution to the 
understanding of the pugnacious and emulative instincts in 
his essay on "The Moral Equivalent of War," The neces- 
sity is not merely for a moral equivalent of war between 
nations, but for a moral equivalent of the equally damaging 
war between classes within nations. Economic foresight 
comes to consist more and more of devising methods of find- 
ing productive expressions of the energies which underlie 
military and industrial war. History teaches the futility of 
attempts to abolish the instincts and energies which give 
rise to war, but psychology teaches the soundness of efforts 
to give men the thrill and glory and hardihood and zest 
of combativeness in the larena of economics. Rivalry with 
one's fellow workers, keen exertion to win promotion, a 
clear vision of increasing efficiency in work, a sense of 
pride and mastery — accomplishment — all these are capable 
of drawing upon the instinctive energies that are potential 
for war. They offer what Wallas calls the * ' nervous tonic ' * 
for belligerency. They are the background of the assertion 
by R. B. Wolf, based upon wide experience as an industrial 
engineer, that "The present labor unrest is the natural 
result of diverting the creative instinct of the work- 
man from constructive to ^destructive channels. . . . 
Just so long as the majority of workmen are using their 
brains merely to direct their bodies and are doing work 
which requires little or no thought, just so long shall we 
have industrial unrest." . . . 

Lippmann lays down the significant assumption that 
"every lust is capable of some civilized expression. . . . 
Behind evil there is power. . . . Training and opportunity 
decide in the main how men's lusts shall emerge. Left 
to themselves, or ignorantly tabooed, they break forth in 
some barbaric or morbid form. Only by supplying our 
passions with civilized interests can we escape their de- 
structive force. ' ' ^ 

This principle of substitute expression of instinct ener- 
gies is accepted from the physiological and psychological 
standpoint by W. B, Cannon, who writes, in reference to 
1 "Preface to Politics," pp. 50-51. 



60 Human Adaptation to Economic Environment 

the instinct to fight, ' ' What is needed is not a suppression 
of these capacities to feel and act, but their diversion into 
other channels where they may have satisfactory expres- 
sion." In addition to the moral equivalents, Cannon finds 
physical equivalents for warlike energies in the form of 
games and sports. His conclusion is, "In competitive 
sports the elemental factors are retained — man is pitted 
against man, and all the resources of the body are sum- 
moned in the eager struggle for victory. And because, 
under such circumstances, the same physiological altera- 
tions occur that occur in anticipation of mortal combat, the 
belligerent emotions and instincts, so far as their bodily 
manifestations are concerned, are thereby given complete 
satisfaction. ' ' ^ 

Rationalization 

There is another way by which the instinct tendencies 
can settle the conflict and deal with the repressive agencies ; 
they may carry out the tendency in such disguised and 
camouflaged form that the repressing agency does not de- 
tect the real incompatibility. In brief, we go ahead and 
do what we feel we want to do, and then justify the deed 
with excuses that seem perfectly plausible to everybody 
and even to ourselves. So our thinking becomes an effort to 
find plausible reasons for what we want to do and think 
and feel and be. 

For example, owing to the herd instincts and the general 
tendencies of imitation, suggestion, etc., Trotter declares 
that the "belief of affirmations sanctioned by the herd 
is a normal mechanism of the human mind, and goes on 
however much such affirmations may be opposed by evi- 
dence" and furthermore, that "reasons cannot enforce 
belief against herd suggestion." So economic beliefs that 
can be paraded under the name of loyalty, or American- 
ism, secure the adherence of masses of people through 
first exciting instinctive herd emotions and later attaching 
thereto a plausible moral. Thus we have the chief labor 
leaders arguing against the chief business men on the open 

1 "Bodily Changeg in Pain, Hunger, Fear and Rage," pp. 291, 297. 



Human Adaptation to Economic Environment 61 

or the closed shop, the labor chiefs pleading for ''Ameri- 
can freedom for the working man," the business chief 
pleading for ''the American or open shop." Both are 
instinctive emotional appeals first and rational justifica- 
tions afterwards. 

It is natural for men to consider an unpleasant idea 
ridiculous, and arguments are easily marshalled against 
an odious proposition. "Society thus brands what is un- 
pleasant as untrue."^ New ideas are apt to be unpleasant 
ideas, because they disrupt habitual modes of thought. 
"The result is," according to Robinson, "that most of 
our so-called reasoning consists in finding arguments for 
going on believing as we do." The editor of a business 
magazine or of a labor periodical may stretch and strain 
his logic mercilessly and go around Robin Hood's barn 
many times before he finds ample justification for the 
latest move of his group, but he is always able to assign 
a reason, even though to one not captivated by the same 
emotions, it may seem often a very absurd one. "When we 
*'get down on" a President of the country or the President 
of a bank, all of his deeds are apt to look black and false. 

It is not important that such beliefs be logical — the im- 
portant fact is that they square with the psychological 
demands from within. An interesting observation made by 
Martin in "The Behavior of Crowds" shows how the wish of 
the radical leads to a philosophy of revolution in which the 
economic order is seen as a collection of forces which are 
steadily, irresistibly rolling forward to the day when they 
will culminate in revolution, — a philosophy admirably 
fashioned to please and satisfy the wish and longing un- 
derneath. In a multitude of mental conflicts the will has 
decided before thinking has even gotten under way. The 
reasoned justification is an afterthought. 

Our own failure is rationalized by placing the blame on 
someone else. So an inferiority, a weakness, an inefficiency 
may be reasoned away by ascribing the fault to the be- 
havior of others. As White states,^ * ' The man who is f ail- 

1 Freud's "Introduction to Psychoanalysis," p. 9. 

2 "Mental Hygiene," p. 59. 



62 Human Adaptation to Economic Environment 

ing in mental efficiency believes that other members of 
the office force are putting up jobs on him, annoying him, 
interfering with him in all sorts of ways so he cannot 
do his work," 

The foreman who exults in power excuses petty tyran- 
nies over his workmen on the ground that they are unruly, 
or insolent, or need discipline, his real reason being his de- 
light in self-assertiveness. The bad workman finds fault 
with his machinery, or his boss or the factory system, 
his real trouble being his own industrial inefficiency, 
which he would be ashamed to confess, even to himself. 
The engineer, having failed in getting his task done or the 
advertising manager, having failed to sell the goods, attrib- 
utes the failure to the impossibility of the task. "It is 
recorded that Lord Kitchener, when a subordinate during 
the South African War began to explain a failure to obey 
orders, said 'Your reasons for not doing it are the best 
I have ever heard; now go and do it.' " The executive 
whose self-assertive instincts make him determined to * * run 
his business as he pleases" surrounds his determination by 
a host of excellent reasons for maintaining industrial 
•autocracy. The profiteer, the labor autocrat, the conserva- 
tive, the liberal, all too often resolve their mental conflict 
by doing what their instinctive nature wants to do and then 
finding good and sufficient reasons for their wilfulness. 

Most motives that are selfish, or licentious, or unsocial, 
or shameful, tend to become sugar-coated with altruis- 
tic-sounding explanations and righteous justifications. A 
man who foresees depression, and fears to suffer the loss 
of having a large stock of goods on hand, suddenly cuts 
prices somewhat in order to sell out in time and takes 
credit to himself as being the great foe of profiteers. An- 
other sees workmen's insurance coming and takes up a 
"safety first" crusade to save himself insurance costs, 
meantime complimenting himself on his humanitarian 
business policies. A worker who dreads to lose his job 
welcomes a philosophy of industry which approves restric- 
tion of production. The conflict of instinct motives be- 
comes solved by doing what men feel impelled to do by 



Human Adaptation to Economic Environment 63 

their instinctive energies and thereupon contriving plaus- 
ible reasons. All this is not necessarily in the nature of 
hypocrisy but is the natural, unconscious way of avoiding 
psychic revolt and maintaining mental harmony, peace 
and consistency. 

Revolt 

The hereditary endowment of instincts of many hundreds 
of thousands of economic workers is so defective or near 
defective that even under the most favorable environmen- 
tal conditions, their adaptation to life's economic needs is 
next to impossible. It is estimated that this class of defec- 
tives numbers upwards of 10,000,000 individuals in the 
United States. When these people find themselves in an 
environment which is not simple and easy to cope with, 
but severely complex and difficult, their mental machinery 
suffers breakdown. In addition to these groups who are 
weakly equipped mentally to begin with, there are other 
large groups who, though normally set up by nature, never- 
theless suffer nervous maladjustment and mental disorder 
when they are obliged to cope with the harsher sections of 
the economic environment. These disrupting features of 
the economic order, by thwarting certain instinctive en- 
ergies and suppressing normal cravings, are direct causes 
of widespread industrial revolt, mania, psychosis, sulki- 
ness, viciousness, and neurosis generally. Such environ- 
mental factors appear under such terms as "unemploy- 
ment," "bad housing," "immigrant congestion," "hire 
and fire," "automaton," "poverty," "foreman'^ ty- 
ranny," "unsanitary factory conditions," "industrial ac- 
cidents," "industrial autocracy," "overwork," "monot- 
ony," "fatigue," "bankruptcy," "lockouts and strikes." 

To understand the origin of such psychic failures, the 
concept of the unconscious comes into play. What we are 
aware of at any one moment, or in any one day is at 
most only a very small portion of all the experiences packed 
away in our mental storehouse. Below the level of the 
conscious is the unconscious. Part of i is past recall; part 
comes back by an effort of recollection, Here ^ist dynamic 



64s Human Adaptation to Economic Environment 

energies of the instincts, craving outlets which environ- 
ment denies. This conflict of nervous energies gives rise 
to inner states of mental and organic tension. Wallas ex- 
plains that ''If we balk any one of our main dispositions, 
Curiosity, Property, Trial and Error Sex, and the rest, we 
produce in ourselves a state of nervous strain. ' ' ^ 

Sciences of psychoanalysis, psychiatry, psycopathology 
and psychotherapy have developed to diagnose and remedy 
the states of conflict and strain. Although still in their 
initial stages and subject to much controversy these studies 
of mental disorders contain some fundamental, and gen- 
erally accepted assumptions which are highly serviceable in 
any attempt at understanding economic behavior. The 
genius of Freud gave these studies their great impetus. 
However, Freud 's extreme emphasis upon the sex energies, 
suppressed as they are by the taboos and revulsions of social 
standards, and his attributing of virtually all neurotic dis- 
ease to this sex repression is generally conceded to be too 
narrow an application of fundamental human processes. 
Jung extended the doctrines to the ego-energies, the life 
impulses as well as to sex, and asserted that nervous de- 
rangement ensued not merely from sex repression, but from 
denial of the "energy of life" which manifests itself in 
"growth, development, hunger, and all the human activi- 
ties and interests. ' ' ^ Rivers relates the successful results 
in treating breakdowns in military life among British sol- 
diers, by applying the essential Freudian methods to the 
so-called "danger instincts, i.e., flight, pugnacity, etc.^ Cer- 
tain American students have found that any of the pri- 
mary emotions — love, hate, hunger, shame, sorrow, fear, dis- 
gust — may cause a neurosis under appropriate conditions 
of repression.* 

Trjtter has pointed out in comprehensive terms that 
the conception of mental conflict is the central feature of 
this whole system of analysis, and he insists that "Of its 

1 "The Great Society," p. 65. 

2 Jung, "Psychology of the Unconscious," p. xxvi. 

3 W. H. River's "Instinct and the Unconscious." 
•* See E. J. Kempf, "Psychopathology." 



Human Adaptation to Economic Environment 65 

importance and validity there can be no doubt. " ^ He finds 
that the repressive factor in this conflict has the impulsive 
energy which comes from the instincts of the herd, and 
that the whole social and economic environment, by set- 
ting up taboos and standards and laws which the social 
instincts accept and enforce, creates the conflict that leads 
on to the mental derangements which are so widespread. 
Kepression, conflict, derangement are the cause to effect 
links in the chain. 

A condensed application of these basic principles is at- 
tempted by Parker in the following form: "The monotony, 
indignity, dirt, and sexual apologies of, for instance, the 
unskilled worker's life bring their definite fixations, their 
definite irrational inferiority obsessions. The balked la- 
'borer here follows one of the two described lines of conduct : 

First, either weakens, becomes inefficient, drifts away, 
loses interest in the quality of his work, drinks, deserts 
his family, or. 

Secondly, he indulges in a true type inferiority com- 
pensation and in order to dignify himself, to eliminate for 
himself his inferiority in his own eyes, he strikes or brings 
on a strike, he commits violence or he stays on the job and 
injures machinery, or mutilates the materials; he is fit 
food for dynamite conspiracies. He is ready to make 
sabotage a part of his regular habit scheme. ... If one 
leaves the strata of unskilled labor and investigates the 
higher economic classes he finds parallel conditions. " ^ 

A sweeping survey of the many business geniuses suf- 
fering from neurasthenia, of the frenzied and distracted 
efforts of executives to adjust their mental powers to kalei- 
doscopic changes in business affairs, of the tortuous 
struggles of labor leaders to maintain themselves in power, 
and of the rebellious, sullen attitudes of irascible laborers' 
indicates the profoundly significant economic consequences 
of repression, conflict, and derangement. 

No small portion of this revolt psychosis arises from the 
all too abundant stimulus of the danger and anxiety in- 

1 "Instinct of the Herd in Peace and War," p. 79 

2 "Casual Laborer," p. 49. ' f • 



66 Human Adaptation to Economic Environment 

stincts and emotions in the economic struggle. The worries 
and fears of the laborer are matched by the worries and 
fears of everybody else in the economic groups. If it is 
not the fear of unemployment, or underpayment, or acci- 
dent, or discrimination, or petty foreman's tyranny, it is 
the fear of bankruptcy, failure, loss of position or of 
promotion, rivalry, competition. In the economic struggle 
for survival, 'anxiety states and distress forebodings hem 
in the participants. Cannon has proved by extensive labo- 
ratory experiments that where the normal instinctive life 
is held in subjection by these fears, "the emotional ac- 
complishments — such as the satisfaction of food and of 
sexual affection, the feeling of self-pride, and the tender 
love of a parent — are whirled suddenly into anger." All 
of the energy that would normally flow into thought, 
creativeness, self-expression, public-spiritedness, and their 
like is arrested and redirected by an overlord in human 
nature, — by the damger and distress mechanisms. This 
recentering of energy involves far-reaching bodily changes, 
such as interference with healthy digestive processes, the 
shifting of blood from the abdominal organs to the lungs, 
the heart, the central nervous system, the increased force 
of heart action, the mobilization of blood sugar, the secre- 
tion of special glands such as the adrenal. The normal 
self-control and rational influence over conduct becomes 
minimized, and militant behavior comes to the front. 
"Where the anxiety states are not so violent, but none the 
less real, the behavior reaction is likely to be seen in inertiia, 
discouragement, depression, loss of interest, maliee, surli- 
ness, or alcoholic indulgence. 

Cannon's work points in the same direction as that of 
Crile. Crile writes, **It is obvious, therefore, that the 
absence of worry and fear may aid in stopping the body 
wide activations which lead to an organic breakdown. . . . 
The effect of fear, grief, worry and jealousy on the physical 
body is seen in the changes in the cells of the brain, the 
adrenals and the liver, and in the numerous resultant dis- 
eases and disabilities. Against man's inhumanity to man, 
religions and philosophies have been evolved, each of which 



Human Adaptation to Economic Environment 67 

aids in proportion to its power to substitute altruism for 
selfishness, to substitute faith for fear. . . . The mere 
knowledge, the mere conviction, that excessive anger, work, 
jealousy, envy, worry or grief cause physical damage as 
serious as that produced by infections or crushing blows 
will constitute a powerful protection to man."^ 

Such is the conclusion drawn from elaborate biological, 
physiological, and psychological investigation. It points in 
the direction of the studies of the more careful of the psy- 
choanalysts, namely, the repressions of the economic en- 
vironment with its herd taboos and fears and compulsions, 
the consequent conflicts of great human impulses, both con- 
scious and unconscious in their workings, and the final 
inner derangements, manias, irascibilities, neuroses, and 
aberrations. In a word, psychic revolt and mental disease 
are the finished product of man's futile attempts to adapt 
his human nature to certain repressive features of his 
economic environment. 

Two ways of escape from the difficulty present them- 
selves: change the economic environment, • or educate and 
change human nature. Any particular economic problem 
has to be solved on its individual peculiarities, but such a 
solution will be some varying combination of these two 
lines of procedure. Keller has warned that "We get the 
idea that man does not adapt to environment, but adapts 
the environment to himself and his needs. But we learn 
no power over nature till we learn natural laws, to eon- 
form and adapt ourselves to them. . . . Our lordship over 
nature consists in the adroitness with which we learn to 
conform."^ The ability to discipline one's instincts and 
emotions, to eliminate the injurious tendencies, to subli- 
mate the potentially dangerous energies of the mind, and 
to avert the calamity of psychic revolt is an indication of 
the efficiency and success of men in their economic pur- 
suits. But many features of the environment make smooth 
adaptation next to impossible, and even when possible, 
humanly damaging. Such dark and pernicious elements 

1 "Man, an Adaptive Mechanism," pp. 12, 377. 

2 A. G. Keller, "Societal Evolution," p. 22. 



68 Human Adaptation to Economic Environment 

need eradication, the environment itself needs alteration. 
Both processes enter into any rational and healthful ad- 
justment between men and their work. 

The remedial treatment of human nature is a proc- 
ess of revelation. Men need to be shown wherein their 
repressions and maladjustments have gotten the better of 
them. The nature of the conflict, the repressive force and 
the inner craving, the meaning of a healthy adaptation, — 
all these need to be revealed to those suffering from the 
psychic distresses of the economic order. It is this pro- 
cedure which Holt summarizes in his book, * * The Freudian 
Wish," in his plea for "a more complete discrimination of 
the elements in the situation to be reacted upon, to resolve 
every situation rather than do violence to it by a summary 
Yes or No." 1 

The human maladjustments are so frequent and so 
damaging that economic activity has created a press- 
ing need for a science of mental hygiene in industry. 
Industry abounds with mental diseases, nervous derange- 
ments, psychic revolts. Misfits and misfortunes harass the 
productive processes. Psychological smash-up occurs at 
every hand. False ideas launch men on fatal ambitions, 
and abnormal habits and defective inborn traits encumber 
their life experiences with distress and tragedy. A science 
of mental hygiene would offer a hope of understanding 
such mental liabilities as are suggested in the following list 
mentioned by Dr. E, E. Southard, "queer guys, eccen- 
trics, disturbers, queruleous persons, unreliable and un- 
stable fellows, misfits, the irritable, the sullen, socially dis- 
gruntled, unsociable, negative, conscientious, litigious, 
bear-a-grudge, peculiar, glad-hand, gossipy, roving, rest- 
less, malicious, lying, swindling, sex pervert, false accusa- 
tor, abnormal suggestibility, and mental twist t3T)es. ' ' ^ 
Southard's opinion appears well founded when he urges 
that mental hygiene is indispensable if there is ever to be 
an adequate analysis and effective control of these patholog- 
ical or near-pathological groups. 

1 Holt, "The Freudian Wish," pp. 134-135. 

2 Industrial Management, Vol. 59, pp. 100-106. 



Human Adaptation to Economic Environment 69 

The conception of economics as a human science does 
not militate against a careful study of the laws and prin- 
ciples which traditionally enter into economic thinking. It 
is indispensable to maintain conceptions of land, labor and 
capital as more or less abstract factors in production. It 
is indispensable to think of the law of demand and supply, 
the principles of exchange, the processes of distribution, the 
theories of value and price, and the statistics of output and 
trade. Economics is indissolubly related to all these gen- 
eralizations and interpretations. But economics which ends 
there, ends too soon. All this is essential but it is not enough. 
Economies is equally a science of the imponderables of 
human nature, — of the motives, emotions, thoughts and 
satisfactions of men engaged in earning and spending an 
income. The ambitions or lack of ambitions of the men 
who work at machines, the degree of dullness or imagina- 
tion in the mind of common labor, the extent to which the 
distribution of comfort and well-being coincides with the 
distribution of income, the human qualities which distin- 
guish what some term the successful from the unsuccess- 
ful classes, — these and the vast outlay of invisible human 
realities to which they may be expanded are an integral 
part of any completed economic thought. Laws, principles, 
statistics all require the vitalizing outlook of the psy- 
chology of men. 

Which is the more important? As well might the ques- 
tion arise, Which is greater, the life of the plant, or the sun- 
shine and the soil? There is no rank of precedence, — ^they 
are a unit. Man is at the center of economics, — a human 
factor, — and it is for him, and by him, and through him 
that all economic control over nature proceeds. Economics 
is not mainly the science of things ; it is the science of life. 
It concerns the realization of human energies, and at the 
basis of all economic behavior lies instinctive nature. 

The chapters thus far have attempted to explain in very 
condensed form the chief psychological conceptions that 
have value in such an analysis of economics. The remain- 
der of the book is an application of them to the more out- 
standing economic processes of the present day. 



70 Human Adaptation to Economic Ewvironment 



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Erdman, I.: Human Traits and their Social Significance 

James, W.: Psychology, Vol. I, 104-128; Vol. II, 383-486 

Swift, C. E.: Mind in the Making 

HoBHOUSE, L. T. : Mind in Evolution 

RiBOT, T.: Psychology of the Emotions 

Bernard: Misuse of Instinct, Psychological Review, VoL 28, p. 
26 

Jastrow, Joseph : Psychology of Conviction 

Jung: Psychology of the Unconscious 

Metchnikoff: The Nature of Man 

Rivers: Instinct and the Unconscious 

White: Principles of Mental Hygiene 

Tridon, a.: Psycho-Analysis 

COOLEY, C. H.: Social Organization; Social Process 

Elwood, C. a.: Sociology in its Psychological Aspects 

Hollingworth : Vocational Psychology; The Psychology of 
Functional Neuroses 

Hollingworth and Poffenberger : Applied Psychology 

Hunter: General Psychology 

Yerkes and others: Point Scale for Measuring Mental Ability 

Yoakum and Yerkes: Army Mental Tests 

Martin: The Behavior of Crowds 

SiDiS, B.: The Psychology of Suggestion 

Titchener: a Beginner's Psychology 

Terman, L. W. : Measurement of Intelligence 

Swift: Psychology and the Day's Work 

.Drever: Instinct in Man 

Ward: Psychological Principles 

Hadley: The Moral Basis of Democracy 

Crile: a Mechanistic View of War and Peace; Man an Adap- 
tive Mechanism 

Addams, Jane: Democracy and Social Ethics 

GiDDiNGS, F. H.: Elements of Sociology; Principles of Sociology 

Pillsbury: Psychology of Nationality and Internationalism 

Sherrington: The Integrative Action of the Nervous System 

Gilbreth: The Psychology of Management 

Link: Employment Psychology 

Kempf, E. J.: Psychopathology 

Wera, E.: Human Engineering 

GoDDARD, H. H.: Human Efficiency and Levels of Intelligence 

Wells: Mental Adjustments 

Conway, M.: The Crowd in Peace and War 

Watson: Psychology from the Standpoint of a Behaviorist 

Warren: Human Psychology 

Cory: The Intellectuals and the Wage Workers 

Hocking: Human Nature and its Remaking 



Human Adaptation to Economic Environment 71 

Patrick, G. T. W.: The Psychology of Social Reconstruction 

Clark, J. M.: Economics and Modern Psychology, Journal of 
Political Economy, Vol. 26, pp. 1, 136 

Williams, J. M.: The Foundations of Social Science, Books 3 
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Taussig: Inventors and Money Makers 

Sumner, W. D.: Folkways 

Holt, E. B.: The Freudian Wish 

McDouGALL, W. : Making America Safe for Democracy; In- 
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Veblen, T.: Instinct of Workmanship 

LiPPMANN, W.: Drift and Mastery; Preface to Politics 

Wallas, Graham: Human Nature in Politics; The Great So- 
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Thorndike, E.: The Original Nature of Man; Elements of 
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Tansley, a. G.: The New Psychology 

Tead, Ordway: Instincts in Industry 

Trotter, W.: Instincts of the Herd in Peace and War 

Parker: An American Idyll; The Casual Laborer 

Patten, S.: The New Basis of Civilization; Heredity and So- 
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British Journal of Psychology: Vols, 8-11 

Robinson, J. H.: Mind in the Making 

Parmelee, J. H.: Science of Human Behavior 

Dewey, John: How We Think; Democracy and Education; Re- 
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Journal c . Economics : Vol. 29, pp. 1-4 



PART n 

ECONOMIC INSTITUTIONS AND 
FUNCTIONS 



CHAPTER V 

THE MECHANICAL AND SCIENTIFIC BASIS OF ECONOMICS 

Machines and science are the means by which men deal 
with wealth. The processes of manufacture, the scale of 
production, the method of transportation, the demands for 
credit, all spring from the state of the mechanical and 
physical sciences. Advances in these sciences determine 
the amount of wealth available for use, the forms which 
it takes, the happiness of men in fitting wealth for con- 
sumption, in fact, all that goes into the make-up of economic 
life. 

Even the simplest processes of machine operation are 
so much a matter of scientific calculation that the work- 
er's common sense cannot be trusted as a guide to effi- 
cient or reasonably intelligent operation. Specialists and 
experts, by long study, experiment, and statistical com- 
putation, are needed to determine the right and effective 
way of making each minute maneuver. But each single 
maneuver has meaning and use only in so far as it is 
properly related and co-ordinated with a hundred or a thou- 
sand other maneuvers by hundreds or thousands of other 
workers, in many separate and scattered plants, often 
located in several countries thousands of miles apart. This 
vast ramification and interdependence requires the most 
elaborate form of scientific calculation, observation and 

72 



Scientific Basis of Economics 73 

forecast, for if one link in the process is cut, the entire 
chain is broken and the economic process is at a stand- 
still. Whether a man shall produce more or less, or whether 
he shall produce at all, hangs upon an infinitely complicated 
network of factors, machines, processes, and materials. A 
failure to make the right adjustment at any part of the 
process entails waste, idleness, anxiety, distress.^ 

The paramount significance of the mechanical equip- 
ment is that it serves to increase the output from a given 
amount of labor. Owing to the use of machinery, the aver- 
age worker producers today more than two and one-half 
times as much as in 1850.^ The worker to-day has produc- 
tive equipment four times as valuable per capita as that 
of his father working back in 1850. This increased invest- 
ment in productive capital, by giving the worker a superior 
mechanical and scientific equipment, has nearly trebled his 
productive capacity. As King summarizes it, "Evidently 
the popular impression is true that, as far as dwelling, 
vehicles, clothing, etc., are concerned, we live in a state of 
luxury that our fathers knew not of. ' ' 

Of course not all of this increased production is avail- 
able for consumption. A great part of production is ma- 
chinery and materials to be used for further production. 
By no means is all of the output in the nature of clothing 
or food or furniture or drugs. In large part it is new 
buildings, new transportation facilities, new machinery, 
and new equipment for carrying on all the processes of 
economic life.^ Since the depression of 1893-1896, we have 
invested as much capital in manufacturing, railroads, 
public utilities and mines as we had invested in those in- 
dustries in all our previous history.* Some conception of 
the magnitude of this class of goods will be gained from 
the estimate that in 1913, the new productive capital turned 
out was about $6,500,000,000, in 1918, $22,000,000,000, and 
in 1919, $15,000,000,000. Goods to these amounts were our 

1 See T. Veblen, "Theory of Business Enterprise," Chapter I. 

2 King, "Wealth and Income of People of United States," p. 43. 

3 Friday, "Profits, Wages, and Prices," p. 78. 

4 Friday, idem, p. 91. 



74 Scientific Basis of Economics 

national excess of production above consumption. The 
excess each year over consumption is in turn devoted to 
more production, and to that extent serves to make possible 
an increase in the productive capacity of the worker. 

On the average between one-seventh and one-fifth of 
the total product goes to the making of these non-consum- 
able goods. Any notion of productive efficiency due to 
mechanical and material equipment must take this non- 
consumable portion of the full national product into ac- 
count. With due allowance for this factor, it is estimated 
that the net efficiency of the laborer in making consum- 
able goods has been at least doubled. Progress in the 
future depends upon improvements in this mechanical, ma- 
terial and scientific factor. Only by this means is it pos- 
sible substantially to increase the output from a given 
amount of labor, and to increase to the maximum the avail- 
able wealth for human consumption. 

Power 

Virtually all economic endeavor nowadays involves in 
some way the use of natural power. Non-human power 
turns the wheels of the economic world. The history of 
human progress is the story of the development of power 
and its application to man's use. Only a half century 
ago, the total horse-power used to drive manufacturing 
machinery was only slightly above two mUlion. In 1914 
it was over twenty-two million. Of this vast amount of 
harnessed power, about 70 per cent, is steam power, 
about 3 per cent, water power, about 4.5 per cent, power 
from the internal combustion engine, and about 20 per 
cent, electric power.^ Obviously, the great bulk of power 
in manufacturing is still derived from the steam engine, 
with electric power second in importance. Since 1904, 
the machine power used in this country by the average 
industrial worker has increased from two and one-half 
horse-power to more than three and one-half horse-power. 
The effect is apparent, for example, in the coal mining 
industry. Owing in large part to his greater use of mining 
1 "Abstract of Census of Manufactures," 1914, p. 492. 



Scientific Basis of Economics 75 

machinery, the American miner digs out two to three times 
as much coal as the miner in English fields.^ Steam, our 
main form of power, has been in turn dependent upon 
supplies of cheap coal and "we are nationally what we 
are to-day because always we could get plenty of cheap 
coal. "2 

About two-thirds of all coal mined is used for generation 
of power. And so abundant have been our coal supplies 
that the most profligate waste has prevailed in its utiliza- 
tion. On the average only 6 to 15 per cent, of the fuel 
energy is actually realized in power. The amount of wast- 
age is staggering and an awakening to the need of conser- 
vation is one of the most pressing economic needs of the 
time. 

Scientists are of the opinion that if the recent past has 
been the age of coal and steam, the future will be an age 
of electricity. Already the hydro-electric power in use is 
equivalent to the energy of 40,000,000 tons of coal. And 
each year the electric power created directly by burning 
coal consumes 30,000,000 tons of that fuel. The most 
abundant future source of electric power is water power. 
This potential energy is at hand for the harnessing. "It 
is estimated that the water power readily available in the 
U. S., if converted into electric energy, is more than capable 
of turning every industrial wheel and illuminating every 
street and building throughout the Republic. ' ' ^ Electric 
power has already been utilized in hoisting machines, 
cranes, conveyors and trucks, in transportation by railroad, 
surface cars, and subways, in mining pumps, ventilators, 
crushers, etc., in refining steel and iron, welding and cut- 
ting metals, in textile, flour and paper mills, and factories 
of almost every variety. It is displacing coal because it is 
cheaper, cleaner, less bulky, more easily transported, and 
more easily handled. In manufacturing lines, it is for the 
most part utilized through the individual motor attached 

1 "Report of United States Bureau of Mines," 1920, "Monthly 
Labor Bulletin," Vol. XI, pp. 118-130. 

2 S. Crowther, World's Work, December, 1920, p. 173. 

3 W. N. Polakov, "Industrial Management," September, 1920, p. 
234. 



76 Scientific Basis of Economics 

to the individual machine. Congress in 1920 passed legis- 
lation which makes it possible for private corporations to 
secure federal grants for the conversion of water power 
into electrical energy. This law makes possible the utiliza- 
tion of the vast potential electric resources of the country. 

The use of electric power releases coal for fuel and by- 
products. The fuel gain is important from the stand- 
point of conservation; the by-products gain is important 
for industrial processes and for consumption purposes. 
More than one thousand coal by-products are in use. Il- 
luminating gas, ammonium sulphate, benzol, coal tar, dyes, 
photograph developers, flavors, perfumes, tanning mate- 
rials, medicinals, explosives, are only a few of these by-pro- 
ducts. They are indispensable in a large number of the 
most important industries of the country. To use the 
words of a power and fuel engineer, "One thing is clear, 
in the economic conditions now arising, the principle of 
electricity as a commodity, the principle of common public 
carrier applied to the transmission of power, and the prin- 
ciple of multiple production for the utilization of sources 
of energy will be the most important, if not the basic, eco- 
nomic force in the life of the people. ' ' ^ 

The internal combustion engine, by utilizing gasoline as 
a source of energy, has had far-reaching effects upon the 
tides of business enterprise. If it had done nothing more 
than make possible the automobile, its accomplishment 
would have stood as a fundamental contribution to 
economic life in modern times. In terms of capital in- 
vested, of workers employed, of profits and wages paid, and 
of volume of product, the automobile industry has become 
one of the major industries of the country. It has set men 
scouring the world for new sources of petroleum, has cov- 
ered the country with a network of good roads, has estab- 
lished a demand for the basic raw materials, and has 
drained the credit supply in financial centers. The inven- 
tion of the Diesel engine, based upon the internal combus- 
tion of oil, has practically revolutionized the methods of 

1 W. N. Polakov, "Industrial Management," September, 1920, p. 
239. 



Scientific Basis of Economics 77 

water transportation, because of the advantages of oil over 
coal as fuel for shipping purposes. 

In its various forms, natural power has been man's con- 
stant and indispensable aid in developing resources, pro- 
ducing wealth, and making possible the intricate economic 
structure of modern times. 

Machinery 

Power combines with machinery to give the economic 
organization its technical character. Most men who work, 
work at a machine. It may be a machine to generate power, 
or a machine to lift material, or a machine to fashion a 
finished product, or a machine to make another machine, 
or a machine to transport men or material or machines a 
distance of ten feet or ten thousand miles. From start to 
finish the economic process rests upon the machine tech- 
nique. 

The outstanding quality of the machine is that it enables 
the laborer, by the use of power, to multiply his produc- 
tive efficiency. In one respect the machine is a labor saver. 
One man with a machine and power is equal as a producer 
to from a few to a small army of men working with bare 
hands or with plain tools. 

The greatest increase of efficiency is attained through the 
principle of automatic machinery. An excellent example 
is the weaving loom. Years ago one woman tended one 
or two slowly moving looms. Now one woman may tend 
anywhere from 12 to 36 looms at the same time, with the 
result that her record of production for the day is increased 
75 times or even more. One girl in charge of 1000 spindles 
spins from 10,000 to 12,000 times the length of cotton yarn 
her grandmother could turn out from her spinning wheel. 
In one type of mill, the machine makes 82,000 yards per 
hour as against 75 yards as the record of the old spinning 
wheel. In the needle trades, a girl operator sits at a power 
sewing machine carrying 12 needles instead of one, setting 
almost 4000 stitches a minute, i A milling machine en- 
ables an operator to drill several holes at one stroke of a 
iGoldmark, "Fatigue and EflBciency," pp. 10, 57. 



78 Scientific Basis of Economics 

lever; other macliines cut several chunks from the metal 
plate at one fall of the multiple blades. The automatic 
machine in its most perfected forms increases the produc- 
tive power of the operator on the average from 75 to 
100 times/ 

During the last fifteen or twenty years, this principle 
of automatic machinery has been applied in some degree 
to practically all of the important production processes. 
The automatic principle is the transfer of human skill and 
intelligence from the man to the machine. Steel fingers, 
wheels, levers and releases perform the motions of crafts- 
manship, — the duty of the laborer being reduced to the 
minimum of simplicity and taking such forms in the high- 
est types of machinery, as merely feeding the raw material 
into the mouth of the machine and taking the finished 
product away from the outlet.^ Typical of these automatic 
devices are molding, screw and grinding machines, turret 
lathes, and pneumatic hammers. 

A recent investigator has found that as a consequence 
of the rapid development of automobile manufacturing, 
"in approximately the decade 1904 to 1914, the automatic 
tool developed into a production power of the highest im- 
portance. In the making of motor ears it became and has 
remained indispensable. Nor is its principle to-day less 
indispensable in the making of thousands of other articles 
of common necessity and use."^ Most package goods, 
bottled goods, and canned goods rely upon automatic proc- 
esses. The president of a large chain of retail stores, doing 
business in all these lines, and both manufacturing and 
selling 5000 different kinds of articles, depends upon 
"standardization, in which lies the future of large volume 
business. . . . The way to manufacture most cheaply is to 
establish a separate department for each article and to 
put it through in continuous repetitive process with a mini- 
mum of human handling. " * In other words, the secret of 
such manufacturing is the automatic machine. 

"i^ Scientific American Supplement, 85:278. 

2 E. F. Lloyd, Journal of Political Economy, 27:457. 

3 Ibid. 

4 System, Vol. 39, p. 355. 



Scientific Basis of Economics 79 

This automatic process necessitates breaking up the man- 
ufacturing of an article into a score, or into hundreds, 
of minute, separate stages. Each stage requires a distinct 
sort of automatic machine treatment. The treatment of each 
stage is standardized and in this form can be repeated mil- 
lions of times without variation. For example in the can- 
ning process the cans are filled automatically by one 
machine. An automatic capper hermetically seals the cans. 
The cans are carried from filler to capper by an automatic 
conveyor. ' ' The capping girl sits close to the red hot seal- 
ing irons, dropping a cap on each can as it is carried swiftly 
by "1 ''Without touch or aid of human hand, an auto- 
matic machine produces complete one-dram bottles at the 
rate of 165 per minute."^ Of the 30 operations required in 
the manufacture of farm machines, one operation requires 
a man to feed sheets of metal into a machine which cuts 
them into a particular form at the rate of 20,000 per day. ' '* 
The automatic switchboard is fast eliminating the tele- 
phone "central." Automatic machinery has displaced 
human effort in many parts of office practice, — in typing, 
sorting, scaling, classifying, filing, addressing, computing 
figures and keeping records. The Webb press for news- 
paper printing turns huge cylinders of paper into finished 
news sheets at the rate of 288,000 eight-page papers per 
hour. Ten operatives are required to handle the gigantic 
contrivance, but the increase of production per worker over 
that of the operator of Benjamin Franklin's printing press 
is about 8,000 times.* The achievements of the automatic 
machine are often uncanny in their imitation on a grand 
scale of the skill of the human hand and brain. They are 
the typical mechanical facts of the present economic age 
and they are daily being extended in new and ingenious 
ways to all branches of industrial production. They 
represent standard quality of products, vastly increased 
quantity of output, and large scale production at minimum 
cost. This development is nowhere better represented than 

1 Goldmark, "Fatigue and Efficiency," p. 61. 

2 United States TariflF Commission Report, 1S18. 
3C. H. Parker, AtUntic Monthly, Vol. 125, pp. 12-22. 

* Scientific Manufacturer's Supplement. 85:278. 



80 Scientific Basis of Economics 

in the steel industry, where "the pig casting machines, 
the open hearth charging machines, not to mention the 
iblast furnace, skip hoist, the electric crane, and the me- 
chanically operated rolling mills have revolutionized the 
industry. For the most part the steel worker of to-day 
is simply moving levers, or watching and waiting while the 
heat and machinery do the work."^ 

The automatic principle is capable of all degrees of 
application. Some machines which require real skill and 
mechanical training are commonly called "semi-auto- 
matic." Others reduce the automatic principle to a mini- 
mum, and rely primarily upon a high-grade vocational 
training. In certain operations the hand tool is still neces- 
sary. But the automatic principle runs through most 
mechanical processes in some form or other. The original 
industrial revolution was attributed to the invention of 
machinery and the use of power; the automatic machine 
of the last twenty years or so is working out what amounts 
to a second industrial revolution. It bids fair to increase 
the productive power of the nation above its record of 
twenty years ago by a much larger ratio than the original 
industrial revolution did over its preceding stage. 

Transportation 

Just as power and machinery are indispensable in the 
economic order, so a third factor, transportation, may claim 
indispensability. Machinery and power have to be con- 
centrated in small circles of industrial activity. Then the 
output has to be distributed on a nation-wide or world- 
wide scale. In a general way, this importance of transpor- 
tation is obvious and axiomatic. 

But transportation has become an economic problem of 
the first magnitude. Transportation by railroad has been 
strained to the breaking point.^ In spite of 230,000 miles 
of railroad track, bearing 2,500,000 freight cars, and 30,- 
000 freight locomotives, railroad transportation, at times 
of great business activity, comes perilously near to break- 

1 Industrial Management, January 1, 1921, p. 63. H. B. Drury, 
Three Shift System, address before Taylor Society. 

2 Scientific American, October 30, 1920, p. 440. 



Scientific Basis of Economics 81 

down. Upwards of one-third of all freight, carried is coal. 
To reduce this huge burden, electricity is being called to 
the rescue. A super-power zone is likely to be developed 
within the next few years in the general Boston to Wash- 
ington district. In a district here comprising about two 
per cent, of the area of the country, a large part of all 
industrial activity is centered. By huge central stations, 
coal energy at the mouth of the mine can be converted 
into electric energy and transmitted, free from any freight 
problem, for manufacturing uses, or electric locomotive 
uses, thereby relieving the railroads from the equivalent 
load of coal freight. The harnessing of water power by 
electric generators will serve yet further to solve the prob- 
lem. Into the heart of the problem, too, comes the motor 
truck, often carrying its load in "fleets," and growing in 
importance and use with amazing rapidity. Ocean trans- 
portation creates the merchant marine problem for both 
economists and statesmen to face, and the prospect of re- 
ducing costs of shipping by substituting oil for coal as 
driving energy has caused a sharp rivalry among the great 
world powers to discover and possess the world's future 
resources of oil. 

The cheapest and most efficient form of transportation 
of petroleum has proved to be pipe lines. Such lines make 
possible the pumping of oil from the Oklahoma oil wells to 
the New Jersey refineries of the Standard Oil Company. A 
grand total of approximately 34,000 miles of pipe lines 
provides the network for oil transportation over the 
country. 

With the developments of automatic and standardized 
production in manufacturing processes, a new science of 
intra-factory transportation has grown up. "In the aver- 
age plant to-day from the time raw materials leave the 
storehouse until they reach the finished product they are 
actually being worked on less than one-third of the time, 
while in certain industries the ratio is as low as one-sixth. ' ' ^ 
This idleness occurs in the interval required to pass the 

1 W. F. Merrill, "Industrial Management," LXI, pp. 261-265, April, 
1921. 



82 Scientific Basis of Economics 

material from machine to machine. Under a scientific 
routing of the production, and an ordering of the processes 
in natural sequence, the material is carried by conveyors, 
belts, trolleys and trucks so that the intervals between ma- 
chine operations are reduced to a minimum. Gaps, pauses, 
delays, waits are eliminated. The material leaves the 
storehouse and is transported mechanically to and from 
each machine or workman in order of sequence. Lifting 
and hauling by hand is done away with. Each specialized 
machine operator performs his unit function with the ma- 
terial as it passes his hands ; the next piece is automatically 
at hand on the conveyor. Automobile manufacturing was 
one of the first lines of industry to perfect the science, but 
it has been taken up widely, and such industries as grocery 
food products manufacturing, meat packing, mail order 
handling, sheet metal products manufacturing, and boot 
and shoe manufacturing take advantage of its methods. In 
the last named industry, eonveying has cut the time inter- 
val of manufacture from raw material to finished product 
from eighteen to less than five days. In textile mills, the 
process of manufacture begins at the top story of the fac- 
tory, and the product follows down from stage to stage, in 
a continuous flow from machine to machine and floor to 
floor, without any carrying by hand. The economy in 
floor space, in time saved, in labor saved, is of the highest 
significance for productive efficiency. 

A branch of this transportation problem has been the 
problem of loading and unloading at terminals. A great 
part of the life of a freight car is spent in idleness, wait- 
ing to be loaded or unloaded, and mechanical facilities 
for handling material at terminals reduces such periods 
of idleness. A single city is said to have released 66,000 
freight cars formerly used in local transfer and switching 
service by utilizing, on a large scale, electric cranes, mo- 
tor trucks, and conveyors. The loading of ships has at- 
tained marvels of efficiency by mechanical contrivances in 
the form of conveyors, hoisters, cranes, etc. Quick han- 
dling of material has become a primary necessity in effi- 
cient use of transport facilities. 



Scientific Basis of Economics 83 

The demands for transportation of people are met for 
the most part by three great types of machinery: the rail- 
road is of course the standard means of long distance con- 
veyance ; for local travel, subways, elevated and surface car 
lines are the chief reliance; and the past twenty years 
has put America on wheels with the automobile. The aero- 
plane is of value within limits, but has not yet justified 
itself for wide-scale commercial uses. The correlation of 
all these travel services affects in substantial ways the lines 
of economic endeavor, the fields of new investment, and 
the future labor question. 

In a broad way, it may be said therefore that the trans- 
portation tendency of the time is to utilize oil and electric 
substitutes for coal in transportation, to utilize equip- 
ment fully by increasing loading and unloading efficiency, 
and to flood the country with the automobile. 

Chemistry ^ 

The science of chemistry has become, along with the sci- 
ences of power, of machinery, and of transportation, one 
of the indispensables in economic organization. The im- 
portance of chemistry was beginning to be apparent be- 
fore the World War, but it took the demands of the war 
period to demonstrate beyond question the imperative im- 
portance of the science in modern economic technique. 
Most concerns now make use of chemical tests to determine 
the quality of the material which enters into the productive 
process. Steel, coal, copper, paint, wood, in fact almost 
every commodity must measure up to certain chemical 
standards. Only by that means can the manufacturer be 
sure of the standard quality of his finished product. The 
chemical laboratory has become a necessary part of the 
strategy of production. Some of the laboratories are of 
such size and importance that they employ several hundred 
chemists. Any conception of the industrial technique 

1 For many of the judgments expressed on Chemistry, the author is 
indebted to information and suggestions given by W. H. Nichols, 
President of the Eighth International Congress of Applied Chem- 
istry and Chairman of the Allied Chemical and Dye Company, and 
by B. C. Hesse, Secretary of the Eighth International Congress, 



84 Scientific Basis of Economics 

would be incomplete without an idea of the significance 
of economic chemistry. 

The war cut American manufacturers off from their 
European source of dye supplies and forced American 
chemists to work out processes by which America could in 
large measure manufacture her own supply. "American 
industries employing over two million men and women and 
producing over three billion dollars' worth of product a 
year are dependent upon dyes."^ Among such industries 
are textile manufacturing, leather manufacturing, paper 
making, paint and ink production. The dyes are a chemi- 
cal by-product of the coal tar industry. The chemistry of 
coal tar dyes is, therefore, an indispensable requisite in a 
large proportion of our needful activities in peace and in 
war. Artificial daylight as the outcome of the chemical 
combination of gases and a simultaneous electrical process 
promises to supply all the properties of daylight. Such an 
achievement will have many important consequences. It 
will make work more safe, will relieve the strain on work- 
ers' eyes, will reduce the amount of spoiled product, will 
improve the quality of workmanship, and will increase 
production. In industries requiring night work or the 
three shift system, the service of chemically produced light 
will obviously be of highest importance. 

Synthetic ammonia and nitric acid derive their nitrogen 
from the atmosphere. Before the war America drew her 
nitrogen from the nitrate beds of Chile, but the war forced 
American chemists to produce nitrogen within her own 
borders. The nitrogen products are the source of fertiliz- 
ers for agriculture, of explosives for mining, construction 
work, and war needs. They are necessary in the manu- 
facture of a number of important products used in every- 
day economic life. 

In the manufacture of steel, chemistry has revolution- 
ized the productive process. The open hearth process of 
steel manufacture has gradually superseded the Bessemer 
process by virtue of the chemical advantage of different 
alloys. The open hearth process uses a high grade of 
iSlosson, "Creative Chemistry," p. 83. 



Scientific Basis of Economics 85 

ferromanganese, whereas the Bessemer process uses a low 
grade manganese alloy.^ In the manufacture of high speed 
tools, such as lathes, milling cutters, reamers, hack-saws, 
etc., tungsten alloys are employed. It was Andrew Car- 
negie who declared that chemistry "was the agency, above 
all others, most needful in the manufacture of iron and 
steel." 

The oil industry owes its existence to chemistry. Criide 
oil is not used much directly, but after a refining process 
in which chemical science plays a controlling part the 
crude oil becomes converted into a wide variety of valuable 
materials. Such materials include local anesthetics, gaso- 
line for internal combustion engines, naphthas, kerosenes 
for light and for farm fuels, lubricating oils and greases, 
waxes, and paraffines, surgical dressings, petroleum coke 
for battery carbons, road oils to lay the dust, asphalts for 
paving, and fuel oils used to generate manufacturing and 
transportation power.^ 

Copper has become indispensable since the electrical in- 
dustry was established. Most of the copper now produced 
is used in that industry.^ The electrolytic refining of cop- 
per is an electro-chemical process and is responsible for the 
development of the copper industry, and indirectly, by 
making possible large supplies of copper wire and other 
copper electrical equipment, for the momentous develop- 
ment in electrical engineering. 

The rubber industry has become an enterprise of the 
first magnitude and the process of conversion from the 
raw material to the finished rubber is dependent upon 
chemical guidance. America's automobile industry is 
made possible by the chemistry of rubber. The vulcaniza- 
tion process is a tribute to chemical science. Synthetic 
rubbers are a scientific realization, but as yet are not con- 
sidered as cheap or as good as natural rubber. 

Practically every industry in the country requires the 
use of sulphur in some form. About two hundred separate 

1 See Eipley, "Trusts, Pools and Corporations," pp. 154-158. 

2 "United States Geological Survey, World Atlas of Commercial 
Geography," Part I, 1921, p. 17. 

3 "World Atlas of Commercial Geography," Part I, 1921, p. 39. 



86 Scientific Basis of Economics 

plants in the United States are engaged in the manufac- 
ture of sulphuric acid. "Hundreds of thousands of tons 
of sulphuric acid is consumed every year in making fer- 
tilizers and tens of thousands of tons in refining petroleum, 
in pickling and galvanizing steel, and in making chemicals 
and drugs. " ^ If there is any one chemical element which 
holds industry at its mercy more than any other, it is 
sulphuric acid. 

"Dishes and utensils of platinum are absolutely neces- 
sary in all chemical laboratories, and upon their laborato- 
ries all great industries are dependent for guidance. ' ' ^ 

It is undesirable to go into exhaustive details on the 
economic uses of chemistry. The science plays a neces- 
sary part in the manufacture of perfumes and flavors; 
cellulose is a chemical product, valuable in the manufac- 
ture of paper goods, laces, cloths, etc. Chemistry distills 
wood into crude alcohol. It lies behind the production 
of gums and resins. The enumeration could be extended 
indefinitely. 

One of the most significant contributions of chemical 
science to production has been in the utilization of by- 
products and waste materials. The immense importance 
of by-products in the coal industry has already been men- 
tioned. It has been reported that the utilization of wastes 
in the meat packing industries is the means by which those 
industries make substantial profits. Eadium has been 
manufactured out of materials that were formerly con- 
sidered useless junk. Slosson claims that two-thirds of 
the cotton crop is cotton seed. Formerly it was thrown 
away. Chemical discoveries have made possible the utili- 
zation of the seed for human and animal foods, for oil and 
lard compounds, for fertilizers, and for many other pur- 
poses. 

The scientific technique of production is clearly depen- 
dent upon the discoveries of chemistry. There seems little 
doubt but that chemistry has a yet more important con- 

1 "World Atlas of Commercial Geography," Part I, 1921, p. 57. 
Also see United States Gteological Survey Bulletin, No. 666, p. 19. 

2 Bulletin, No. 666, p. 35. 



Scientific Basis of Economics 87 

tribution to make in the future. The possibilities of 
cheapening the cost of production, of inventing new goods 
for the satisfaction of human wants, and of increasing and 
improving the country's output are wrapped up in largo 
measure with the future of chemical science. 

Geology 

The development of national resources is indebted to 
the science of geology.^ Formerly, the location of indus- 
tries was decided in very large measure by the proximity of 
raw materials and markets, but in various lines of in- 
dustry to-day, "a New England workshop may draw its 
materials from the five continents and ship its products 
around the world, ... It is no longer enough for us 
to make an inventory of the mineral wealth of the United 
States; we must supplement that inventory by a broad 
understanding of world demand and supply. . . . Knowl- 
edge of what the world contains is plainly the best basis for 
discussing public policy and planning private business."* 

Economic geology furnishes surveys of the location of 
the earth's resources and estimates of their amount and 
value. By scientific analysis of rock formations and care- 
ful calculation of underground resources, geology supplies 
the business executive with invaluable information in the 
planning of business undertakings. To know where beds 
of iron ore of various grades exist and approximately their 
underground area, to have a map of the resources of differ- 
ent grades of coal, to have world diagrams of the important 
oil supplies, to have knowledge of the countries containing 
the future supplies of silver, gold and other precious 
minerals, — these are a few illustrations of the fundamental 
value of geological information in economic calculations. 

A more specific illustration of the usefulness of geological 
science in economic planning is contained in the geology 
of oil. Petroleum has become the "preferred fuel of the 
twentieth century." Fuel oil and gasoline are now com- 

1 G. 0. Smith, "The Strategy of Minerals." 

2 "United States Geological Survey, World Atlas of Commercial 
Geography," Part 1, 1921, Introduction. 



88 Scientific Basis of Economics 

mercial necessities and national leadership on the sea and 
in the air has come to depend absolutely upon the pos- 
session of adequate supplies of these two commodities. 
Petroleum supplies have been explored and surveyed all 
over the world. The findings of the geologists indicate 
that the world's supply of petroleum during the next dec- 
ade will come mainly from South American countries 
that border the Caribbean Sea, from Mexico and from 
Mesopotamia and Persia. International rivalries for con- 
trol of these sources are conspicuous in political and econo- 
mic statesmanship among the Great Powers. Knowledge 
of the probable duration and capacity of the richest oil 
wells is indispensable in all such deliberations. 

Economics is thus obliged to take into its reckoning the 
findings of geological scientists, and their discoveries are 
an integral part of the mechanical and scientific technique 
of modern industry. 

Electricity 

Many of the contributions of electrical science have al- 
ready been mentioned in this chapter. Electrical engineer- 
ing has reshaped many manufacturing processes, and has 
made possible new production achievements which were 
considered impossible less than a generation ago. 

Electricity has come into almost universal use for light- 
ing purposes. Electric lighting has come to be a science 
in itself. The flaming arc light, the electric naercury 
lamp, the incandescent bulb, and the ordinary electric arc 
are the most important forms. By proper adaptation of 
these forms to the particular needs of factories, offices, 
streets and households, the engineers are able to furnish 
reasonable comfort, safety and efficiency. 

The value of electricity for power has in part been re- 
ferred to previously. Electric cranes for hoisting ma- 
terials, electric trucks, electric mining machinery, electric 
ventilators, electric locomotives, electric railways, electric 
automatic machines, — ^these are a few of the more impor- 
tant power adaptations. It is estimated that between the 
years 1914 and 1919 the amount of electrical energy sold 



Scientific Basis of Economics 89 

for power consumption in the country nearly trebled. Al- 
ready there are over one million industrial motors served 
by central power stations. One of the largest automobile 
manufacturing plants has found it advisable to install in 
all new construction an individual motor for each machine. 
"The increased cost of energy, belting and shafting, the 
need of better factory lighting, the advantage of having 
better working conditions and the responsibility imposed 
on manufacturers by workmen's compensation laws are 
among the chief reasons which led to the almost universal 
adoption of individual drive by this company." For both 
manufacturing and transportation purposes, electric power 
has rapidly increased in application during the last ten 
years. Its possibilities for the future are of primary sig- 
nificance. 

Electric heating is of increasing use in manufacturing 
processes. The electric iurnace for manufacturing steel, 
especially the high grade steel products, is a practicable 
realization. Electric welding has been widely adopted. 
Electric treatment in the refining process of a number of 
minerals has proved its value. 

Electric contrivances for home convenience and domestic 
work-saving have been the object of a great deal of in- 
ventiveness. Electric cookers, washeirs, ironers; electric 
vacuum sweepers and cleaners, — ^these with a long list of 
other inventions have stimulated large and growing manu- 
facturing enterprises in the electrical field. 

Electric communication is of the utmost utility in the 
present delicate and intricate economic organization. The 
ability to flash news from continent to continent determines 
huge financial investments and the ability of the chief ex- 
ecutives of the large scale combinations of plants to keep 
in touch with the activities of all subsidiary branches and 
to direct their affairs smoothly and efficiently rests upon 
the telephone and telegraph. A strike of telegraph and 
telephone operators would be virtually as serious for the 
country as a strike of the railroad workers themselves. 
There are over thirteen million telephone stations in the 
United States. 



90 Scientific Basis of Economics 

Many large corporations have found electricity of such 
importance that they have established laboratories for elec- 
trical research. A conspicuous example is the American 
Telephone and Telegraph Company whose laboratories en- 
gage thirteen hundred scientists and engineers to devote 
their time exclusively to research and development in the 
telephone art. 

The financial consequences of the rise of electrical in- 
dustries are considerable. The total output of all electrical 
materials in 1920 is estimated at about $2,000,000,000. 
Moreover, it seems a reliable estimate that by 1930 the 
electrical industries will require upwards of $10,000,000,- 
000 for new capital in the form of new plants and manu- 
facturing facilities. In its various relations, therefore, 
electricity has come to occupy an indispensable position in 
the technique of the industrial process. 

The Science of Economic Organization 

So numberless are the factors in the mechanical tech- 
nique, so various are they in their bearing upon different 
parts of the economic process, so indispensable are they 
to the operation of the system, and so interdependent are 
all of their functions in the scheme of things, that a 
science of organization has become imperative. Justice 
Louis Brandeis of the United States Supreme Court has 
observed that, "The field of knowledge requisite to the 
more successful conduct of business has been greatly widened 
by the application to industry not only of chemical, 
mechanical, and electrical science, but also the new science 
of management; by the increasing difficulties involved in 
adjusting the relations of labor to capital ; by the necessary 
intertwining of social with industrial problems; by the 
ever-extending scope of state and federal regulation of 
business. . . . This new development is tending to make 
business an applied science. ' ' ^ 

This applied science has a number of important branches. 
John Dewey states, "The most important occupations 
of to-day represent and depend upon applied mathe- 
1 "Business a Profession," pp. 2-3. 



Scientific Basis of Economics 91 

matics, plij^sics and chemistry." The whole science of or- 
ganization in the strictest sense involves the correlation 
and administration of countless mechanical and human 
factors. The engineer is the typical scientific expert in 
the field. There are in the United States, it is estimated, 
upwards of 200,000 engineers of one kind and another as- 
sociated in engineering societies. Twenty-one major socie- 
ties are united in The Federated American Engineering 
Societies, and utilize their central association for the pur- 
pose of advancing the sciences of technical engineering. 
Typical of the branch societies are the mechanical, the 
electrical, the mining, the chemical and the industrial 
engineers. 

A capital illustration of the possibilities of engineering 
science is found in the achievements of F. W. Taylor in 
improving the art of cutting metals. He carried on up- 
wards of 50,000 experiments over a period of twenty-six 
years. The real problem was "how to remove chips from 
a casting or a forging, and how to make the piece smooth 
and true in the shortest time." The experiments 
developed twelve variables which involved a very in- 
tricate mathematical solution. These variables related 
to (1) the hardness of the metal, (2) the chemical composi- 
tion, (3) the thickness of the shaving of metal, (4) the 
shape of the cutting edge, (5) the use of a cooling stream 
of water on the cutting tool, (6) the depth of the cut, 
(7) the duration of the cutting process, (8) the lip and 
clearance angles of the tool, (9) the elasticity of the work 
and of the tool, (10) the diameter of the material being cut, 
(11) the pressure of the chip or shaving on the cutting 
edge, (12) the pulling power and the speed and feed 
changes of the machine. An expert mathematician might 
be able to solve a single problem of variables in from two 
to six hours. This would take too long for practical pur- 
poses and, of course, the average worker would be any- 
thing but an expert mathematician. A way of simplifying 
the mathematical calculation was sought, so that the aver- 
age workman could adjust the speed and feed of his 
machine quickly and accurately. The whole problem was 



92 Scientific Basis of Economics 

from time to time presented by Taylor to one after another 
of the noted mathematicians of the country. The mathe- 
maticians declared the problem hopeless of solution, but 
finally some experts under Taylor's supervision discovered 
the principle of the slide rule. "By means of this slide 
rule, one of these intricate problems can be solved in less 
than a half minute by any good mechanic, whether he 
understands anything about mathematics or not, thus mak- 
ing available for everyday, practical use the years of ex- 
perimenting on the art of cutting metals." Thereafter, 
"with the aid of a slide rule ... it was possible for the 
scientifically equipped man, who had never before seen 
these particular jobs, and who had never worked on this 
machine, to do work from two and one-half to nine times 
as fast as it had been done before by a good mechanic who 
had spent his whole time for some ten or twelve years in 
doing this very work upon this particular machine."^ 

Technical engineering is obviously necessary for the ef- 
fective co-ordination of all the factors of mechanical and 
applied science. The multitudinous details have to be 
related, the machines properly arranged, inventions and 
discoveries adequately sought for, the power facilities effi- 
ciently connected, the mechanical equipment suitably in- 
stalled, and all brought into a single clock-work of efficient 
functioning. 

Another branch of the applied science of management 
is human engineering. The task of fitting men to machine 
work, of securing interest in work and developing morale 
and loyalty, of stimulating motives and making the ma- 
chine technique develop rather than retard the human 
personality, — the whole task of handling men in their in- 
dustrial pursuits has evoked the science of industrial, or 
human, relations. It is here that the principles of psychol- 
ogy become of primary value, for the problem is essentially 
one of understanding human behavior, and directing human 
conduct. 

A further branch includes all the other activities of 
management which fit the technology of the productive 

1 F. W. Taylor, "Principles of Scientific Management," pp. 99-113. 



Scientific Basis of Economics 93 

equipment and the behavior of the human equipment into 
the price system of the economic order. The ownership of 
the mechanical equipment, the methods of remunerating 
the human equipment, the structure and operation of the 
market in all of its ramifications of buying and selling, 
the maintenance of the credit system of banking and in- 
vestment, the adjustments of international commerce and 
finance, — all of these must be statistically measured, 
charted, judged, forecasted, recorded, and related. The 
interconnections of all the parts, the indispensable adjust- 
ments from the beginning to the end of the whole process, 
the co-ordination of methods and the formulation of har- 
monious principles, require the most careful application of 
scientific methods to the general unifying problem of man- 
agement. The mechanical and scientific basis of modern 
production would result in utmost chaos were it not for 
the steady unifying power of the applied science of manage- 
ment which holds all parts of the technological universe in 
their proper courses. 

Psychology of Engineers and Inventors 

The motives of the men who have created the mechanical 
inventions and made the scientific discoveries which under- 
lie the whole technology of the economic system are for 
the most part of a distinct type. The paramount motives 
of inventors and scientists differ in no small degree from 
the paramount motives of the owners of the economic 
equipment. In the former, the constructive impulse, the 
creative bent, the instinct of curiosity are particularly 
strong. Unflagging scientific curiosity impels men to 
protracted and exhaustive research until a new scientific 
law is discovered, or a new chemical element revealed, 
or a new electrical principle arrived at. The motives un- 
derlying discovery and invention are comprehensively 
stated by a vice president of the American Telephone and 
Telegraph Company as follows: ''Pure scientific research 
is conducted with a philosophic purpose, for the discovery 
of truth, and for the advancement of learning. . . . The 
work of the pure scientists is conducted without any utili- 



!94 Scientific Basis of Economics 

tarian motive, for as Huxley says, 'that which stirs their 
pulses is the love of knowledge and the joy of discovery 
of the causes of things .... the supreme delight of ex- 
tending the realm of law and order ever farther toward the 
unattainable goals of the infinitely great and the infinitely 
small, between which our little race of life is run.^ The 
pure scientists are the advance guard of civilization. By 
their discoveries, they furnish to the engineer and indus- 
trial chemist and other applied scientists the raw material 
to be elaborated into manifold agencies for the ameliora- 
tion of the condition of mankind. ... I do not say this 
because a new incentive is necessary for the pure scientist, 
for in him there must be something of the divine spark and 
for him there is no higher motive than the search for the 
truth itself."^ A National Research Council has been 
formed in the United States for the sake of organizing 
and promoting research along scientific lines. Through the 
systematized effort of this scientific body and through the 
individual investigations scattered over the country, the 
technology of the productive system is steadily improved 
and enlarged. The solution of problems of efficiency, 
safety, health, and wealth rests in fundamental ways upon 
the progress thus achieved in industrial and scientific re- 
search.2 

A preponderant creative impulse is likewise obvious in 
the lives of the general run of inventors. In an original 
study of the psychology of inventors, F. W. Taussig re- 
marks, **One thing stands out conspicuously: the race 
of contrivers and inventors does obey an inborn and ir- 
resistible impulse. Schemes and experiments begin in 
childhood, and persist so long as life and strength hold. 
It matters not whether a fortune is made or pecuniary dis- 
tress is chronic : there is increasing interest in new dodges, 
unceasing trial of new devices. ... It would seem that no 
satisfaction from pecuniary success or worldly recognition 
equals the absorbed interest of trial, experiment, novel 

1 J. J. Carty, Bulletin No. 8, National Research Council, February 
6, 1920, p. 5. 

2 Yerkes, "The New World of Science," pp. xii-xiii. 



Scientific Basis of Economics 95 

problems, happy solutions,"^ Inventiveness is not, how- 
ever, an unmixed motive. It is intertwined with others 
in a wide variety of combinations, depending upon the 
individual instinctive equipment and upon the experience 
of the personality. The desire for public service, for the 
general welfare, for the national defense, frequently is 
prominently mixed with inventiveness. The desire for 
profit from the invention is usually present and often plays 
a vital part in directing the course of the inventive in- 
stincts. It is a common matter for the inventor to give his 
time and energy to that problem which promises the larg- 
est money reward. Patent rights are jealously guarded. 
Yet the inventor is notoriously lacking in business sagacity, 
and is the easy victim of unscrupulous contractors. The 
illustrations are frequent where the inventor is persuaded 
to sell his invention for a fraction of its real value. Busi- 
ness ventures by professional inventors suffer an abnor- 
mally high degree of failures. The hope of pecuniary 
gain is indispensable to call forth the most effective 
inventiveness of men in the present economic organization. 
But underneath, the major, propelling instinctive factor 
is the pure love of making something new. That class of 
men who have given society its stock of mechanical inven- 
tions and processes, prove the power and vigor of the 
motive of creativeness. 

The motives in those classes of engineers which control 
and manage and direct the whole mechanical and scientific 
technique exhibit essentially the same combination of in- 
stinctive dispositions. Engineers are not indifferent to 
high salaries, and generally speaking, seek for the position 
which offers the highest pecuniary reward. Nor are they 
indifferent to considerations of the welfare of the country, 
and the means of promoting it. But the pivotal instinctive 
energies which have been most conspicuous among the en- 
gineers of all classes are those of constructive achieve- 
ment, productive efficiency, and advance in scientific 
management. The psychology of this group is reflected in 
a declaration of principles made by the leading industrial 

IF. W. Taussig, "Inventors and Money Makers," pp. 21-22, 48-54. 



96 Scientific Basis of Economics 

engineers of the United States in 1919, This declaration 
reads in part as follows : ' ' The prevalent unrest in industry- 
results from a system which permits the acquisition of 
wealth for which no adequate service has been rendered 
and tolerates special privilege with the resulting exploita- 
tion of men, women and children. 

"Great powers have been used arbitrarily and auto- 
cratically to exact unmerited profit or compensation by 
both capital and labor. This policy of exacting profit 
rather than rendering service has wasted enormous stores 
of human and natural resources and has put in places of 
authority those who seek selfish advantage regardless of the 
interests of the community."^ The conduct of the en- 
gineers as a class demonstrates the practicability in 
economic affairs of drawing upon the instincts of con- 
structiveness, achievement, public service, and economic 
usefulness. Wherever pecuniary motives come sharply in 
conflict with these motives, they have been curbed to a 
striking degree by the profession of engineering. Wher- 
ever pecuniary motives could go hand in hand with these 
other motives, the combination has been made, with a gain 
in intensity and in scope of achievement. 

The possibility of an overhauling of economic motives is 
thus seen to be one not altogether theoretical and specula- 
tive. At the basis of the economic order rests the 
mechanical and scientific technique. It has been invented, 
step by step, and is steadily organized and managed by 
types of men in whom motives of constructiveness, curios- 
ity, achievement and usefulness are primary. The careful 
observation of the distinguished English economist, Alfred 
Marshall, is that "it is true that the best energies of the 
ablest inventors and organizers of improved methods and 
appliances are stimulated by a noble emulation more than 
by any love of wealth for its own sake. ' ' ^ 

Those people who are accustomed to insist that unre- 
stricted and unlimited profit-making is the alpha and 
omega of business psychology, and who prophesy with em- 

^ Industrial Management, November, 1919, Vol. LVIII, p. 419. 
3 "Principles of Economics," 1916 edition, p. 14. 



Scientific Basis of Economics 97 

phatic certainty that any attempt to mold economic in- 
stitutions and social standards in forms calculated to put 
motives of constructive achievement to the front is a 
move toward making business motives enemic and effete, 
face some basic facts in the psychology of inventors and 
engineers which do not square with their theories. En- 
gineers, administrators, organizers, inventors are a liv- 
ing demonstration of the virility and vigor of men act- 
ing under a high degree of constructive and creative 
motivation, and there seems no doubt that executives 
and managers of business establishments are undergoing 
a gradual evolution of a similar sort in their motivation. 
The forceful words of C. H. Cooley are directly to the 
point: "One of the main forces in keeping economic 
motive on a low moral level has been the doctrine that 
selfishness is all we need or can hope to have in this phase 
of life. Economists have too commonly taught that if 
each man seeks his private interest the good of society 
will take care of itself, and the somewhat anarchic con- 
ditions of the time have discouraged a better theory. In 
this way we have been confined in a pernicious state of 
belief and practice, for which discontent, inefficiency, and 
revolt are the natural penalty. A social system based on 
this doctrine deserves to fail. ... It is false even as 
economics, and we shall never have an efficient system until 
we have one that appeals to the imagination, the loyalty, 
and the self-expression of the men who serve it. . . . There 
is a trend throughout society to substitute higher motives 
for lower, and this is not only because the former are 
more agreeable, but because they are more effectual. ' ' ^ 

Certainly nothing could be of deeper significance for the 
future of economic welfare than a gradual evolution of 
general business instincts and motives along the lines pre- 
valent in the men who invent and administer the techni- 
cal foundations of all economic life, — the engineers, scien- 
tists and inventors. Among these men, non-pecuniary 
motives are for the most part in the ascendency, and bring 
about the solidly constructive accomplishments of the 
1 "Social Process," pp. 132, 135, 136. 



98 Scientific Basis of Economics 

mechanics and science of production. Pecuniary motives 
are present and mix constantly, but the other motives are 
also fundamental. Their practicability is thereby demon- 
strated, 

REFERENCES 

BoGART, E. L.: Economic History of the United States, pp. 356- 

400 
Callender, G, S.: Economic History of the United States, pp. 

471-487 
MacVey: Modern Industrialism, pp, 3-19; 133-156 
Veblen, T,: Theory of Business Enterprise, Chapter I. 
Abstract of Census of Manufacturing, 1914 
Report of United States Bureau of Mines, 1920 
POLAKOV, W. N.: Industrial Management, Sept., 1920, pp. 234- 

239 
Scientific American Supplement, 85: 278 
Goldmark: Fatigue and Efficiency 

Lloyd, E. F.: Journal of Political Economy, Vol. 27, p. 457 
United States Tariff Commission Report, 1918 
Parker, C. H. : Atlantic Monthly, Vol. 125, pp. 12-22 
Drury, H. B.: Three Shift System, Industrial Management, 

Jan. 1, 1921, p. 63 
Marshall, L. C: Readings in Industrial Society, pp. 417-467 
Merrill, W. F.: Industrial Management, Vol. 6, pp. 261-265 
Slosson: Creative Chemistry 
United States Geological Survey, World Atlas of Commercial 

Geography, Part I, 1921 
^United States Geological Survey, Bulletin No. 66 
Taylor, F. W.: Principles of Scientific Management 
Carty, J. J.: Research Council, Bulletin No. 8, 1920 
Yerkes: The New World of Science 
Taussig, F. W.: Inventors and Money Makers 
Marshall and Lyon: Our Economic Organization, Chapters 6, 

8-14, 23-25 
Thompson, Holland: The Age of Invention 
Marsh: The Evolution of Automatic Machinery 
Marshall, A.: Industry and Ti-ade, Books I and II 
Reitell, Chas. : Journal of Political Economy, Vol. 26, p. 274 ff. 
Friedman, E.: American Problems of Reconstruction, pp. 89- 

150 
Lippincott: Economic Development of the United States 
Adams, H. C. : Description of Industry 
Keir, M. : Manufacturing Industries in the United States 
Fiske, B. a.: Invention: The Master Key to Progress 



CHAPTER VI 

LABOR: ITS PART IN PRODUCTION 

The objective of labor activity in industry is the pro- 
duction of goods or the rendering of services. The goods 
may be intended either for immediate consumption or for 
the production of other goods, and the services may vary 
from those rendered by a domestic servant to those ren- 
dered by a factory workman. ^ 

The chief factors in production are land, labor, capital 
and management. The distinguishing function of labor is 
the operation of machinery, and the handling of material. 
This function of labor is performed under the direction and 
guidance of management. The material and machinery 
are the capital which is ultimately under the control of 
the owners. Labor's part in production is distinctly con- 
fined to the following out of plans, methods, and processes 
under the guidance of powers higher up. It is not labor's 
function to decide whether new machinery shall be in- 
stalled, or who shall own the machinery, or where the ma- 
terial shall come from or to whom the finished product 
shall be sold. Labor feeds raw material into the machine, 
lifts the levers and fingers the controls, takes the product 
away from the machine and either by hand or by the 
manipulation of further machinery transports the machine- 
made product to places where it can be used. 

This restriction of labor's function was carried to an ex- 
treme in what has come to be known as Scientific Manage- 
ment. To quote F. W. Taylor, "In almost all the mechanic 

1 "Labor" has come, by general usage, to mean productive effort 
which involves a substantial amount of manual and muscular energy. 
This usage of the term does not imply that the mental energy 
expended by management is not labor ; nor does it imply that laborers 
are lacking in mental capacity. The generally accepted meaning of 
the term is the one in use in the analysis of this chapter. 

99 



100 Labor: Its Part in Production 

arts, tlie science which underlies each act of each work- 
man is so great and amounts to so much that the work- 
man who is best suited to actually doing the work is in- 
capable of fully understanding this science without the 
guidance and help of those who are working with him or 
over him, either through lack of education or through in- 
sufficient mental capacity." In the carrying out of this 
division of function, the part of management is to plan, 
to invent, to conceive new ways of doing things, to plot 
new arrangements of machinery, to devise the science of 
production from beginning to end. At the same time, the 
part of labor is unquestioning acceptance of the technology 
worked out by management. Labor's part is primarily 
muscular and only secondarily mental. Labor's part is to 
use the fingers, the hands, the arms, the eyes, the ears, in 
lifting, watching, pushing, pulling, carrying and hand- 
ling. In many economic processes, this division O"*^ function 
is carried to such an extreme that the imagination and 
thought of labor is not only unnecessary but is apt to in- 
terfere with the efficient operation of the machine. In 
other processes, the mental tax upon the laborer is still 
considerable, but even in these cases, the broader, the more 
fundamental features of the science of production are de- 
signed and laid down for him by engineers and managers. 

The mechanical processes which labor carries through 
involve endless repetition. The operation of the automa- 
tic machine requires that the laborer shall touch the same 
lever in the same way, at the same speed, several thousand 
times per day. Where the machinery has not become com- 
pletely automatic, the repetitive motions which the laborer 
performs are the chief features of his part of the oper- 
ation. The inevitable consequence of repetition is monot- 
ony. The incessant performance of the same motion day 
in and day out, thousands and tens of thousands of times, 
leaves scant room for variety, newness, imagination, or 
originality. The work becomes irksome, fatiguing, unin- 
teresting, monotonous. ^ 

1 See S. H. Slichter, "The Turnover of Factory Labor," pp. 188- 
191. 



Labor: Its Part in Production 101 

This depressing monotony is not, however, the outcome 
of all automatic inventions. The best cure for monotony 
and dullness is often not less machinery but more machin- 
eiy. The processes of production which involve great mus- 
cular exertion under high temperature, or in an atmosphere 
saturated with obnoxious gases, can be reduced to auto- 
matic treatment with great advantage to the laborer. A 
careful investigation of steel manufacturing processes has 
shown that, formerly, men were on the twelve-hour day, 
but worked only six or seven hours of that period. During 
the remainder of the period the workers were waiting for 
various processes to be finished. Now, with machinery and 
science in control of the blast furnaces and the conveying 
operations, the hard, gruelling labor is reduced to a mini- 
mum and men are responsible for watching and guiding, 
by the manipulation of levers and the pushing of electric 
buttons, vast and important processes in the making of 
steel. The observations of T. N. Carver led to the con- 
elusion that the automatic machinery for the manufacture 
of shoes imposes less monotony and drudgery upon the ma- 
chine operative than was formerly experienced by the old- 
fashioned cobbler laboriously making a single pair of shoes. 
With adequate regard for such facts, it remains true, 
however, that the general consequence of the automatic 
mechanical principle has been a marked increase in monot- 
ony for laborers. 

Much of the mechanical process when carried on auto- 
matically makes unnecessary a high degree of skill or in- 
genuity on the part of the operative. The wide studies of 
R. F. Hoxie disclosed that "the workman no longer knows 
his trade as he did under the handicraft system. Modern 
capitalistic and machine industry has progressively special- 
ized him . . . till now the average workman knows only 
one or a few minute processes connected with any enter- 
prise and has no means of broadening his knowledge." 
In cases where this tendency reaches its more extreme de- 
velopment, the worker's duty in standing at the machine 
is so simplified that even the most ignorant workers can- 
not err. Such machines are termed "fool proof." Recog- 



102 Labor: Its Part in Production 

nizing this fact, some scientific managers have claimed that 
many operations can be performed most efficiently by 
workers who in their temperament and intelligence most 
nearly resemble the ox or the guerilla. It has been found 
that for many processes the mentally dull, — even the men- 
tally deficient — are the best operatives. It has been 
estimated that perhaps fully one-half of the industrial proc- 
esses can be carried through effectively by those who have 
had no vocational training. The human consequences are 
suggested by C. H. Cooley as follows: "Men, women, 
children find themselves required to work at tasks, usually 
uninteresting and often exhausting, amidst dreary sur- 
roundings, and under such relations to the work as a whole 
that their imagination and loyalty are little, if at all, 
aroused. Such a life either atrophies the larger impulses of 
human nature or represses them to such a degree that they 
break out from time to time in gross and degrading forms 
of expression." 

Out of this situation has developed a tendency for 
American workmen to avoid wherever possible the un- 
skilled, untrained, ignorant functions. These have come 
more and more to be assumed by immigrant workers. A 
line of cleavage has grown up, roughly and approximately 
speaking, between American skilled workmen and immi- 
grant unskilled workmen. A class feeling has grown up 
between the two groups. The skilled workman looks with a 
certain amount of condescension upon the lower ranks of 
common unskilled labor. The skilled worker is proud of 
the fact that he is not on the low plane which requires no 
distinct amount of mental capacity. As Hoxie explains, 
**The skilled workers in general have no love for the un- 
skilled; the successful for the unsuccessful." 

The function of labor is for the most part being per- 
formed very greatly to the dissatisfaction of the managers 
of industry. Productive efficiency is frequently only a 
fraction of its possibilities. The workers lack interest, lack 
enthusiasm, and in consequence often not only are indif- 
ferent to the efficiency of production, but deliberately 
soldier on the job. One great problem of production at the 



Labor: Its Part in Production 103 

present time is to enlist the constructive instincts of labor- 
ers in their work. This outstanding problem of production 
is not the invention of new machines but the invention 
of new ways and means for drawing out the creative inter- 
est of the workers. Without such a creative interest, pro- 
duction is predestined to remain at absurdly low levels. 

A wide variety of devices are being resorted to by pro- 
gressive managers as a means of arousing the instinct of 
workmanship. Inventors are being called upon to take 
into account the human factor in the construction of new 
machinery. Engineers are giving attention to methods of 
organizing the production processes which will harmonize 
with the interest of the workers. When laborers are found 
to *'go stale" at certain machines, or to suffer excessive 
depression or fatigue, they are moved around the plant 
to machines of different types in order to have variety. 
Progress charts are posted in order to give the laborers 
a clear picture of the amount of work which each man is 
doing in comparison with his fellow laborers, also to give 
each man a chance to compare his output to-day with that 
of the year previous. Managers in progressive plants call, 
for suggestions from the workers about economy, better 
arrangement of machines, new inventions, and desirable 
working conditions. Joint conferences are held to discuss 
with the laborers policies for the improvement of workman- 
ship and means for inspiring creative interest in the shop. 
A pride in work is secured by placing emphasis upon the 
quality of the output rather than upon the quantity alone. 
Kivalry between individual workers, between gangs, and be- 
tween whole departments of the plant is employed to 
stimulate the imagination and enthusiasm of the workers. 
All in all, the end and aim is to put into the worker's life 
a content of thinking, planning, suggesting and under- 
standing. 

The last thirty years has witnessed a remarkable de- 
velopment of mechanical invention and of the application of 
science to economic methods. In the course of this develop- 
ment a point has been reached at which the human nature 
of the workers finds it difficult to make an efficient adapta- 



104 Labor: Its; Part in Production 

tion to the economic process. Regardless of what outside 
inventors and scientists have sometimes considered labor 
ought to do, his bundle of instinctive tendencies has made 
him the human being that he is, often unreasonable, often 
Tinmechanical and unautomatic, often brilliant, often child- 
ish, often uncontrollable. The question. How much will 
a worker produce ? is met by the apt remark. As much as he 
wants to. Economic science faces the task of leading and 
inspiring, not driving and threatening labor. There is 
already sufficient experience to indicate that this problem 
is not a matter of mawkish sentimentalism or Utopian 
dreaming but is a practical possibility of human engineer- 
ing. It means putting man and all of his instinctive ten- 
dencies at the beginning and end of thought about the 
laborer's part in production, and it necessitates readjusting 
machine and management to fit the human nature of the 
workman. 

The Job 

Labor's opportunity to carry out its part in production 
constitutes the job. The opportunity to work and thereby 
to earn a living is indispensable to the laborer's life. In its 
present form the job is an opportunity which may be given 
to the laborer or taken away by powers utterly beyond his 
control. The laborer has no right to a job. There is no 
established legal responsibility on the part of anybody to 
guarantee the laborer a steady job. The employer may give 
or withhold as he sees fit. The employer retains the right 
to hire and fire for reasons good and sufficient in his 
own eyes. The opportunity to carry out labor 's function is 
therefore a precarious one, and is created or destroyed by 
powers of management above and beyond his influence or 
control. 

To lose his job is likely to bring distress and fear to the 
worker and his family. Both he and his dependents face 
the demands of the landlord, starvation, and the keenest of 
social dreads and anxieties until a new job can be found. 
This may take weeks or months. In the meantime the 
state of rnind and body of the worker tends toward de- 



Labor: Its Part in Production 105 

moralization. As stated in detail by Leseohier, unsteady 
employment ' ' undermines his physique ; deadens his mind ; 
weakens his ambition ; destroys his capacity for continuous, 
sustained endeavor; induces a liking for idleness and self- 
indulgence; saps self-respect and the sense of responsi- 
bility; impairs technical skill; weakens nerve and will 
power ; creates a tendency to blame others for his failures ; 
saps his courage; prevents thrift and hope of family ad- 
vancement; destroys a workman's feeling that he is tak- 
ing good care of his family; sends him to work worried 
and underfed ; plunges him in debt. ' ' ^ 

The loss of a job may be the fault of the worker himself, 
or on the other hand, may arise from causes completely 
beyond his control. In the average industry, approxi- 
mately one-half of the causes of a change of employment 
lie within the volition of the worker himself. Among such 
causes for the laborer voluntarily leaving his job are fits 
of temper, mean and disagreeable foremen, unsatisfactory 
wages, excessive hours, no prospect of advancement, the 
wanderlust, bad housing accommodations, poor health, 
and attractive opportunities elsewhere. The other half 
of the changes of employment are due to the volition of 
the employer. Of this half the larger proportion of changes 
are in the form of lay-offs due to industrial depression, 
seasonal shut-downs, bankruptcy, new mechanical inven- 
tions. The smaller proportion is in the form of dis- 
charges due to inefficiency, unreliability, insubordination, 
agitation, union affiliation, etc. The causes for the worker's 
withdrawing from a job, or for his being dropped from a 
company payroll are obviously in a very large measure 
psychological. Dissatisfaction, temperament, instinctive 
ambitions, and all the moods and impulses of both worker 
and employer enter into the unsteadiness of work. With 
surprising frequency, the shift of employment has no trace- 
able connection with careful, deliberate, rational calcula- 
tion but is due to outbursts of instinctive passions, or to the 
domination of fixed prejudices. In many eases the work- 
er's quitting of the job is an act without foresight, or re- 
i"The Labor Market," p. 107. 



106 Labor: Its Part in Production 

gard for distressing consequences to follow. There is a 
large group of workers whose mental equipment does not 
enable them to protect themselves from the rashness of 
blind quitting. As pointed out by Dr. H. M. Adler, "There 
are individuals in a community who for a variety of rea- 
sons are not able to regulate their conduct on the basis of 
experience." 

The amount of turnover of labor varies greatly from com- 
pany to company, but in the aggregate attains alarm- 
ing proportions. It has been estimated that on an average, 
in order to maintain 1,000 constantly at work it is 
customary to employ one thousand new men during the 
year to replace 1,000 old ones. In other words, the aver- 
age rate of turnover is about 100 per cent. However 
there are some plants in which the turnover runs as low 
as 10 to 20 per cent, and others in which it ranges from 300 
to 600 per cent. Taking industry as a whole, government 
investigations form the basis for the estimate that to keep 
five million workers fully employed throughout the year 
1914, there were about four million accessions and four 
and a half million separations, or a total of more than eight 
million workers changing jobs that year. 

A true picture of emplojTnent, therefore, presents a 
stream of constant come and go, incessant hiring and firing. 
This extreme flux and change affects most severely about 
one-half the workers. The other half endeavors to stick 
to the job. For the latter employment is something steady 
and permanent. They stay with the same company for as 
large a portion of their lifetime as economic conditions 
will permit. The high rate of turnover occurs because of 
the extreme fluctuations occurring among the other half of 
the workers. For them a job is an affair of a few weeks 
or a few months. Due to their own unfitness they are 
fired, or due to their discontent at conditions within the 
plant the job becomes irksome almost as soon as it is taken. 
This half of the laboring population is on the march from 
plant to plant a large share of the time. For them em- 
ployment is an unstable, uncertain, fickle, temporary af- 
filiation. 



Labor: Its Part in Production 107 

The cost of labor turnover is immense. The cost to the 
employer in terms of dollars and cents ranges from $25 to 
$200 or more per employee. For employees the loss of 
earnings during unemployment, the expense and difficulty 
of obtaining new jobs, the low wages while learning a 
new job, the greater exposure to accident in unfamiliar 
work, the cost of moving the worker's family, the loss of 
skill by the shift of occupation, and the demoralization 
and discouragement from idleness are tremendous. 

Attempts to reduce labor turnover have been frequent 
during the last decade. It was formerly supposed that the 
ready mobility of labor was thoroughly useful because it 
evened up the supply and demand of workers in various 
communities and served to adjust the labor market to 
business requirements the country over. In recent years, 
however, this mobility of labor has come to be looked 
upon as an undesirable burden to both the employer and 
the employee. At first, employers sought to reduce turn- 
over by special devices contrived almost exclusively with 
eyes centered upon the turnover problem. Gradually this 
viewpoint has been abandoned and in its place has arisen 
the belief that turnover is an index of the whole policy of 
labor management of the corporation. No single trick or 
device has magic powers to reduce turnover. All phases of 
the corporation policy need to be placed upon a sound 
footing, and thereafter turnover will take care of itself. 
There are certain phases of corporation policy which have 
more importance in reducing turnover than others. To 
quote Slichter, * ' The foremost important features of a job 
to the average factory workman are : 

1. The wages. 

2. Its steadiness. 

3. Its psychical and nervous demands upon him. 

4. The hours. 

As these four overshadow all other features of the job 
in importance to the workman, making the work attractive 
in these four respects must necessarily form the founda- 
tion of attempts to reduce the turnover. . . . Men will not 



108 Labor: Its Part in Production 

remain at work because of incidental attractions when 
matters of fundamental importance are unsatisfactory." ^ 
Under favorable conditions turnover can be reduced, so 
most authorities agree, to approximately a 20 per cent, 
basis.^ 

The unsteadiness of the job has the most intimate bear- 
ing upon industrial morale and upon the degree of loyalty 
existing between the employer and the employee. Unsteadi- 
ness of employment operates as a direct cause of disloyalty 
to the company. The worker feels that wages, hours, and 
working conditions are so unsatisfactory that he is ready 
at any moment to leave the job. If he does not leave on 
his own accord a foreman or superintendent may fire him 
for reasons good or bad. Under these conditions he be- 
comes the victim of a weak, and often vicious industrial 
morale. It is next to impossible to feel loyal to the com- 
pany because he receives too many indications that the em- 
ployer feels no sense of loyalty to him. The employer 
stands ready to close down his factory when business con- 
ditions are poor regardless of the discomfiture among his 
workers, and with that understanding in the worker's 
mind, it is but natural for his instinctive tendencies to 
react in terms of resentment. 

Among a very large group of employers, this state of un- 
certainty and unsteadiness of employment is looked upon 
as a valuable weapon over the employees. If the worker can 
be kept in a state of fear and dread of being fired, it is 
thought that he will be spurred to efficiency and obedience. 
The right of firing, with loss of pay, is supposed to be es- 
sential in order that men may have an incentive to work 
thoroughly. The knowledge that a line of applicants is 
standing at the factory gate eagerly asking for jobs is con- 
ceived as an intimidating force. The discipline of fear is 
hung over the workers' heads. The attempt to appeal to 
the emotions of fear and to establish industrial discipline 
upon the instinctive tendencies which connect themselves 
with worry, anxiety, privation and distress is, however, 

i"The Turnover of Factory Labor," p. 251. 
zLescohier, "The Labor Market," p. 116. 



Labor: Its Part in Production 109 

definitely repudiated by the more progressive business men. 
Fear may drive men to work, but work done under such 
compulsion has neither the spirit nor the efficiency which 
is possible of realization when other motives are brought 
out. As Cooley remarks, ''Fear is a poor motive, because it 
does not evoke those energies which are bound up with am- 
bition, sympathy, social imagination and hope." To quote 
F. J. Miller in a presidential address to the American 
Society of Mechanical Engineers, ''The old driver method 
of management will no longer do. . . . The workers of 
every country have acquired a new status. Realizing the 
great difference between a body of employees all enthusias- 
tically co-operating, and a body of employees rendering 
only such service as they think necessary to hold their jobs, 
these men [engineers] are giving this problem their best 
attention. 

The fear discipline holds the mass of workers to a low 
margin of safety. At any minute they are in danger of 
losing the opportunity to work, and with that they lose 
the opportunity to livelihood and safety. This condition 
maintains what has been called "a pain and deficit 
economy," that is, an economy in which the worker is 
always on the verge of unemployment and privation. The 
never-ending uncertainty under the fear regime brings a 
heavy human cost. It means that workers have at pain- 
fully frequent intervals to "turn to new occupations, form 
new habits, and think new thoughts." As Cooley finds, 
"the principle that human character deteriorates under 
irregular and uncertain employment is an old one and, I 
believe, undisputed. ' ' ^ 

In the job is wrapped up all that means most in the life 
of the working man. It is his opportunity to be a useful 
member of society. It is his opportunity to carry out the 
instinctive and mental energies which make him a human 
being. For him it contains the means to all that life holds 
worth while. It is, in short, for the worker the very life 
of life. The fear discipline which is associated with un- 
restricted right to hire and fire and with irresponsible 
1 Cooley, "Social Process," p. 184. 



110 Labor: Its Part in Production 

power to intimidate and coerce men by threats of unem- 
ployment strikes at the heart of the worker's life. Pro- 
gressive employers have discovered that the fear discipline 
can be moderated with immense human gain to the work- 
ers and with a corresponding benefit to the employers in 
terms of productive efficiency and sound industrial morale. 

Hours of Work 

The hours of work are affected by two primary economic 
factors: first, hours should not exceed the maximum con- 
sistent with the health and welfare of the workers ; second, 
within this limitation, hours should not fall below the 
minimum consistent with high production. The first factor 
is chiefly a question of the length of time a worker can 
stay at his task without suffering injurious fatigue, and, 
at the same time, of the length of working day which will 
allow him enough leisure to take advantage of the en- 
joyments and recreations and duties of a wholesome life. 
It is a human factor pure and simple. The second factor 
is chiefly a question of securing the length of work day 
which will maintain the worker in sufficient health and 
morale to make possible a maximum of efficiency in pro- 
duction. 

The exact prevalence of the eight hour day is not known, 
but that it has had a steady and rapid growth during the 
last five or ten years is beyond question. It seems clear 
that in spite of the rapid spread of the movement, a ma- 
jority of American wage earners are still outside the scope 
of the eight hour limit. From 1915 to 1919, the number 
of workers newly brought within the scope of the eight 
hour day was approximately three and one-half millions. 
During the war and after, the authority of governmental 
boards and commissions, both state and federal, and the 
approval of the President of the country was given to the 
principle of the eight hour day for most industries. This 
amounts ordinarily to the forty-eight hour week. 

The principle is to be conceived as a flexible one. The 
length of day for each industry is a matter for scientific 
determination in that industry. A careful scientific study 



Labor: Its Part in Production 111 

of fatigue, monotony, productive efficiency and other re- 
lated factors is necessary to determine in any specific in- 
dustry the most effective length of working day and week. 
Even though the normal for most industries has been ap- 
proved as the forty-eight hour week, nevertheless there are 
others in which the forty-four hour week has been found 
better, and still others in which a fifty-four hour week has 
been found the most advantageous. 

The scientific determination of the length of work day 
for each industry requires also the consideration of over- 
time. Not infrequently the eight hour base is set as a 
standard from which to figure wages, whereas the actual 
length of work day involves overtime at extra pay. Such 
a situation has prevailed on many railroads, at the wish 
of the workers themselves, because of the extra earn- 
ings made possible for them. In frequent cases the over- 
time is exacted by the employer against the wishes of the 
workers, because of his desire thereby to increase output 
for the time being. The whole problem of overtime is a 
proper matter for scientific determination within each in- 
dustry. It is a problem which deserves treatment by other 
means than guesswork or the whims or prejudices of either 
employer or employee. 

The steel industry has been one of the most offending in- 
dustries in resisting a reduced working day. However, 
a number of individual plants have eliminated the 12 or 
14 hour day with its frequent shift necessitating 24 hours 
of continuous labor, and their action has proved the 
shortening of hours practicable from a production stand- 
point. Under the new schedule, the three shift system, 
of eight hours each, has been tried out successfully. The 
largest steel company, the United States Steel Corpora- 
tion, announced in 1921 its approval of the reduced hours 
policy and its determination to put the new policy into 
effect. For other industries problems of night work, of 
the seven day week and of the hours of women and children 
remain to be settled by the same method of scientific 
analysis. 

Long working hours have been objectionable because of 



112 Labor: Its Part in Production 

their liarmful effects upon the mental and physical health 
of the worker. Long hours under modern conditions of 
production generally result in injurious fatigue, "The 
problem of hours has undergone a fundamental change 
through the introduction of large scale factory production 
and the growing concentration of our population in cities. 
Men and women can work relatively long hours at work 
which is interesting, which calls upon their various ener- 
gies, which gives some opportunity for creative self-expres- 
sion. Work which is repetitive, monotonous and con- 
ducted under the confining indoor conditions of even the 
best industrial plant, especially where the plant is located 
at a distance from the homes of the workers, makes much 
more exacting physical and nervous demands. ' ' ^ The pro- 
ductive process imposes upon the delicate, nervous and 
physical mechanism of the human operator a speed of 
motion, a monotony of operation, a distraction of noise, an 
imminence of industrial accident, a fear of bosses and a 
lack of interest, all of which accelerate the accumulation of 
waste products in the body, the exhaustion of vital energy, 
the straining of the nervous organism and the tension of 
the mental powers. 

Tests applied to many industries have demonstrated 
that fatigue is a cause of increased accidents. The dullness 
of mind, the tiredness of nerve, destroys the alertness and 
quickness of reaction which is necessary for a "safety 
first" operation of many types of machines.^ Moreover 
fatigue makes the worker excessively liable to nervous 
breakdown, to morbidity and moodiness, and predisposes 
his bodily constitution to an easy contraction of serious 
diseases. 

In addition, fatigue brings the worker to such a de- 
pressed physical and mental state that it is difficult for 
him to enjoy the leisure hours at the end of the day's toil. 
When he is too tired to play, too deadened to read, too 
fagged out to benefit from recreation, his leisure hours lose 
a large part of the value which they should contain. 

1 President's Second Industrial Conference Report, 1920, 

2 See Goldmark, "Fatigue and Efficiency." 



Labor: Its Part in Production 113 

Fatigue unfits the worker to enjoy leisure and to do justice 
to his responsibilities of citizenship. 

The comment of Dr. F. S. Lee carefully appraises the 
experience of recent years. He declares, "If a man is 
worked beyond his physiological limit, he is incapacitated 
for his duties to his family and to society. The history of 
labor has demonstrated this abundantly, and the experi- 
ence of reducing the hours of labor has almost universally 
been followed by marked moral and social improvement, 
such as is shown by decrease in intemperance and crime, 
improvement in living conditions, greater efforts toward 
education, greater intelligence and greater industrial ef- 
ficiency — all this in contradiction, not only to the vivid 
predictions of disaster pronounced by active and un- 
principled opponents of the change, but to the fears of those 
who were well meaning but timid. ' '^ 

The effect of fatigue upon productive efficiency is to di- 
minish it. The British Health of Munition Workers Com- 
mittee found that for women engaged in certain forms of 
lathe work a "fifty hour week yields as good an out- 
put as a sixty-six hour week and a considerable better one 
than a seventy-five hour week. ' ' ^ Investigations of cotton 
manufacturing indicate that between fifty and fifty-six 
hours per week secure the maximum efficiency in that in- 
dustry. The most productive length of working day is 
therefore a matter of scientific ascertainment. In some in- 
dustries the 54-hour week has evoked maximum produc- 
tion; in others, the 44-hour week.^ The twelve hour day 
has, practically without exception, been found subversive 
of maximum production. Insistence must be made that 
not guesswork, nor sentiment, is adequate to decide for any 
particular branch of work what is the most effective work- 
ing period. Scientific measurement is the only adequate 
means of finding the proper period. 

''■Science, 44:733. Also see Goldmark, "Fatigue and Efficiency," 
pp. 279-283. 

2 "Ministry of Munitions, Health of Munitions Workers Committee, 
1918," p. 35. 

3 See Brooks, "Labor and the New Social Order," p. 250. Also 
Goldmark, "Fatigue and Efficiency," p. 174. 



114 Labor: Its Part in Production 

The relation between shortened hours and increased ef- 
ficiency is summarized by H. B. Drury, after a careful 
study of the experience of several American steel com- 
panies on long and short work periods. His conclusion is, 
* * The mere change from twelve to eight hours in an indus- 
try where everything centers around huge machines and 
furnaces is simply an opening of the door for greater 
efficiency, not a consummation of it. What is necessary if 
the industry is really to get what it should out of the 
shorter day is a thorough-going reorganization. The occu- 
pation must be changed, the spirit of the men, the type 
of foremen. What the introduction of the three shift 
system does is simply to open up a new country. . . . 
But to harness this new energy, as to develop a new coun- 
try, will take time," 

The progress of fatigue elimination has come about by 
a number of different avenues. The pressure of labor 
unions for the eight-hour day by collective bargaining was 
the original stimulus behind the movement. State legis- 
lation has fixed hour limits for women and children very 
widely, but only in comparatively few cases for men. The 
eight-hour day was determined for the railroads by Con- 
gressional statute in 1916 and in 1921 more definitely 
applied by the Federal Railroad Labor Board. The ex- 
treme hazards of the mining industries has led most of 
the states in which mining is an important industry to 
limit working hours to eight in one day. In a number of 
cases the voluntary action of the employer has led to the 
reduced length of working day. Scientific management 
and personnel administration has given valuable study to 
the problem and much encouragement to the movement. 
At the same time, rest periods have been interspersed in 
the day's work as a means of preventing undue fatigue 
and maintaining maximum efficiency. The adequate 
length of meal times, the regulation of night work, the 
granting of Saturday half-holidays and of legal holidays, 
the allowance of one day's rest in seven, and the assurance 
of annual vacations have all come into being in a great 
many industries under the stimulus of the same agencies as 



Labor: Its Part in Production 115 

brought about the reduction of the length of the working 
day.^ 

Of course, the mere fact that the worker is granted 
more leisure does not insure that he will make wise use 
of it. As a matter of fact, an alarming proportion of the 
people who have received the opportunities that go with 
more leisure have made abominable use of the opportuni- 
ties. During leisure hours, the worker is a consumer, and 
the art of consuming wisely has not been properly de- 
veloped in economic society. The education of consumers 
to a wholesome use of leisure time, and to a proper stand- 
ard of spending income is imperative, if the shortening 
of the work day is to be a safe social achievement. This 
matter is treated more in detail in later pages. 

The net outcome of the whole movement may be stated 
in terms of a reduction of the human cost of industry 
without a reduction in productive efficiency. J. A. Hob- 
son writes, "The first plea for a shorter work day is one 
which our analysis has made self-evident. It will greatly 
reduce the human cost of production in most processes. 
For, as we recognize, the strain of muscular and nervous 
fatigue, both conscious and unconscious, gathers force and 
grows with great rapidity during the later hours of the 
work day." Less fatigue and more leisure means an en- 
hanced amount of human development. It means an op- 
portunity for the enjoyment of a sound family life, and for 
the development instead of the discouragement of per- 
sonality. It means a higher capacity for thought, an ex- 
pansion of curiosity, and a lifting of imagination. To 
recognize these human values is not to undermine econo- 
mics with vapid sentimentalism. An economic order exists 
for the use and service of the members who work in it, 
great and small, wise and foolish. Unless it serves to bring 
men nearer to a realization of their best selves, it is dan- 
gerously defective. It must be positive and actually have 
a dynamic urge in the direction of less exhaustion and more 

1 See Commons and Andrews, "Principles of Labor Legislation," 
1920, pp. 221-224, and Spaeth, Industrial Management, February, 
1920, p. 121. 



116 Labor: Its Part in Production 

exhilaration; it must not be negative and impose undue 
hardships which tend to make it difficult to move forward. 
When this idea has been incorporated in the technological 
organization of industry it has generally been proved that 
the human principle is at the same time the true efficiency 
principle. Human considerations and efficiency considera- 
tions are in thorough harmony. A redistribution of leis- 
ure, of rest, of health, of imaginative power, of social 
enjoyment is the outcome and this outcome is sound 
economics. 

Wages 

Labor's reward is given in the form of a wage. The 
wage is simply a money payment in return for the perform- 
ance of labor's function. The amount of this payment in 
terms of dollars and cents is the nominal wage; the pur- 
chasing power of this payment in terms of food, clothing, 
housing, etc., is the real wage. Obviously real wages are 
the important factor from labor's standpoint because a 
high wage which is more than offset by high prices does 
not mean a high purchasing power. VThe real wage arises 
from the ratio between the price paid for labor and the 
price which labor in turn is obliged to pay for all the neces- 
sities and comforts of life. 

In technical calculations and in engineering plans, labor 
is of necessity measured in abstract units, under such 
phrases as "per man hour," and "unit labor cost." From 
other standpoints, labor is not an abstract conception or a 
theoretical idea, but a group of human beings with human 
personalities and human necessities. Labor is capable of 
hope and ambition, pain and distress, feelings and ideas. 
Moreover, wages themselves in the real sense of the term 
are not an abstract sum. They represent food for the 
satisfaction of human hunger, clothes for the comfort and 
gratification of the human body, a home, children, educa- 
tion. As abstractions, labor and wages tend to lead the 
mind away from the warm and human realities of labor's 
part in production and it is necessary to fill the terms with 
a genuine human content. 



Labor: Its Part in Production 117 

Economic speculation about the laws of wages has 
evolved various theories, each stressing some particular 
factor in the wide range of forces which influence the final 
sum going to labor. One notable wage theory is the sub- 
sistence theory emphasizing the so-called iron law of wages. 
The essence of the theory is that wages tend to reach the 
lowest level upon which it is possible for labor to exist, 
and that any effort on labor's part to raise wages by arti- 
ficial means, such as union organization, is balked by an 
iron law of economics. The theory does not take fully into 
account the fact that the level of subsistence is capable of 
being raised if the productive efficiency of labor can be 
substantially increased. The level of subsistence has 
doubled or trebled in the most advanced countries during 
the last two or three generations because machinery and 
science and capital have multiplied the productive effi- 
ciency of the average worker. Productive efficiency has 
increased more rapidly than has population, with the re- 
sult that the standard of living and the standard of sub- 
sistence have been raised. 

Another conspicuous theory is the wages fund theory by 
which certain economists teach that out of the total fund 
of production arbitrary and unchangeable economic laws 
lay aside a certain fund of wages which is the inevitable 
amount available as labor's share in production. If labor 
in one section forces wages up, the artificial excess which 
is thereby squeezed out of the total fund means that labor 
in another section will have its w^ages reduced by a corre- 
sponding amount. The exact and strict form of statement 
of the theory is too narrow to find application in actual 
economic life. The theory does not take into account the 
possibility of increasing production by the invention of 
methods of wage payment as incentives to efficiency, nor 
does it take into account the pressure which can be brought 
to bear by organized labor or reform legislation. The 
wages fund has been highly variable, the chief limita- 
tion upon it being that beyond a certain point wages will 
encroach upon the returns to management and ownership 



118 Labor: Its Pa?'t in Production 

so greatly as to discourage them from undertaking their 
part in production. 

A third theory is the commodity theory of wages. Ac- 
cording to its teachings wages are subject to all of the 
market laws of supply and demand. The price paid to 
labor is fixed in the same way as the price paid for pig 
iron or coal. A large supply of labor relative to the de- 
mand leads to a low wage and a low supply of labor rela- 
tive to demand leads to a high wage. Labor is looked 
upon as a thing to be bought and sold in the same fashion 
as any other commodity. Labor has long smarted at the 
humiliating inference of the theory, and organized labor 
in 1916 secured the passage of a law through Congress de- 
claring that labor should henceforth not be considered a 
commodity or an article of commerce. Experience since 
that time has indicated that the passage of a congressional 
statute does not alter the attitude of employers towards 
employees, nor prevent them from still hiring labor at as 
low a figure as the market will bear. A number of fea- 
tures of the commodity theory are important. It con- 
siders labor as a collection of individual units, but fails to 
consider the changed marketing power of labor as an or- 
ganized group. A million men in the labor market as 
individuals might find their wages fixed by arbitrary forces 
of supply and demand, but H^e same million laborers or- 
ganized into a powerful labor union might be able, as 
experience has abundantly shown, to raise the wage level 
considerably above the old market figure. In practice the 
effort of employers to consider labor as an article of com- 
merce has amounted to an attempt for the most part to 
secure the maximum of work for the minimum of wages. 
Labor has widely matched the attitude of the employers 
by determination to give the minimum of work for the 
maximum of wages. The laborer when looked upon as a 
commodity has come to feel that so far as wages are con- 
cerned he ''gets what he can," whereas the employer has 
come to feel that the laborer after all "gets just what he 
deserves." The commodity theory of labor, therefore, 
leads to unwholesome and embittered feelings in the i^- 



Labor: Its Part in Production- 119 

dustrial world. It takes little account of the need of the 
workers to live, and reckons as of little importance the 
higher elements in the human factor of industry. 

A fourth theory is the productivity theory, by which it 
is held that "competition secures for the laborer just what 
he produces." If the wage is low, that of itself, so the 
theory runs, is an indication that the productive efficiency 
of the worker is low. In criticism of this theory, it may be 
pointed out that although it is true that wages cannot ex- 
ceed the productive power of labor, nevertheless it is at the 
same time true that there is no way of measuring the pro- 
ductive power of labor. All efforts to determine the 
proportionate parts which the electrician, the telephone 
girl, the janitor, the machine operator, the industrial en- 
gineer, and the salesman contribute to the finished pair of 
shoes are obviously futile. Moreover, even where rough 
approximations are estimated of the part played by each 
member of the productive organization, it remains true that 
the employer need not pay in full the estimated share of 
each. As a matter of fact, the general tendency on the 
part of employers is to make as low an estimate as possible 
of the share of labor in the productive process and there- 
after to pay out in the form of wages a sum as far below this 
estimate as conditions will permit. A further feature of 
the productivity theory is ^Vportant, namely, that if the 
share which labor receives for its productivity encroaches 
too much upon the share assigned to management and 
ownership, these latter factors will withdraw from the 
productive process. It will not be worth their while to 
continue. The limit to which each of the factors can go in 
exacting its share is the point at which any other factor's 
share becomes so small that that factor is driven out of 
business organization. 

Obviously there are important respects in which each of 
these theories coincide with th'^ economic facts of the mod- 
ern day, and other equally important respects in which 
these theories give a grossly inadequate interpretation of 
the facts of the case. It is therefore much more service- 
able and accurate to conceive of a pluralistic theory of 



120 Labor: Its Part in Production 

wages and to interpret them as the resultant of a very 
wide variety of influences. For purposes of clearness 
and convenience these influences may be grouped under 
the following headings: standard of living, incentives, 
bargaining power, habit and custom. 

Standard of Living 

The standard of living as a basis of wage determina- 
tion is a comparatively new principle in economic life 
and is not yet universally accepted. The older concep- 
tion was that industry made possible the payment of 
only a limited wage, and it was not the fault of the em- 
ployer if this amount was so low as to make it scarcely 
possible for the laborer to live, even in the dirtiest and 
meanest fashion. The business acknowledged no re- 
sponsibility for paying a wage w'hich made certain a 
fixed standard of living among the workers. But dur- 
ing the last half generation, the principle has been 
winning increasing acceptance that the industry owes the 
workers a good standard of living. An industry which can- 
not afford to pay a wage adequate for such a standard is 
parasitical on society and cannot justify itself. Although 
the new idea is still short of realization in many lines of 
industry, nevertheless there is a steady tendency toward 
its wider acknowledgment. 

War time government boards did much to strengthen 
the movement, acting under the conviction that the stand- 
ard of living as a wage principle has both an humanitarian 
and an efficiency justification. Felix Frankfurter, as 
chairman of the IFnited States War Labor Policies Board, 
asserted: "The lesson of the war is that the adoption of 
so-called industrial standards, involving also standards of 
distribution of the product in the form of wages, results 
in a higher and more continuous output. 

* ' As to wages, the general level has increased during the 
war. That is partly the reflex of economic conditions ir- 
relevant to the discussion, but there was also a conscious 
effort to raise submerged standards of existence for work- 
ers." Moreover this standard is not the income for the 



Labor: Its Part in Production 121 

individual, but for the faimly, "since the family is the 
unit of industrial work. ' ' ^ 

The living wage allows for a wide range of interpreta- 
tion. The truest conception of the principle is briefly 
stated by Frank P. Walsh, joint chairman of the National 
War Labor Board in the following form: "Now that 
term is one having different meanings to different per- 
sons. The living wage suggests, perhaps, that amount of 
wage which will keep life in the human body. That is, 
of course, not what we understand by it. It has a definite 
meaning in the w^orld of industry and in the literature of 
modern economics. It means the amount of wage upon 
which a worker and his family may be able to subsist in 
health and with reasonable comforts. ' ' ^ The range of ex- 
penditures covered by the living wage comprehends such 
items as food, housing, clothing, fuel, light, carfare, health, 
insurance, and sundry minor factors. The minimum which 
an American worker needs in order to be able to keep him- 
self and his family in a state of reasonable comfort and 
health is the living wage. To insure vitality, health and 
vigor is not merely good ethics; it is good business. The 
American standard of living is higher than that of many 
other countries, and this fact of itself accounts in consider- 
able measure for the relatively high efficiency of the 
American worker. 

The exact amount of wage which is necessary to meet 
such a minimum requirement is difficult to state for the 
simple reason that price levels are constantly fluctuating 
and with their changes, the purchasing power of wages 
fluctuates accordingly. The essential question is not: 
How much is the wage figure but rather how much will the 
wage buy? .Before the war, the consensus of a number of 
careful wage and cost of living investigations was that for 
the family of the common laborer, an income of less than 
$850 does not permit the maintenance of a decent Ameri- 
can standard of living. This figure, as in the case of 
those mentioned later, applies to a family of five members. ' ' 
This is taken in wage studies as "the average family." 

^Survey, Dec. 7, 1918. ^ Idem. 



122 Labor : Its Part in Production 

Similar studies made during the year 1918 indicated that 
the minimum of subsistence at that time ranged between 
$1,400 and $1,500. W. F. Ogburn states, ''Such a 
standard of living corresponds approximately with that 
of common or unskilled labor, and is what is generally 
referred to as a living wage." Fluctuations of prices 
and wages subsequent to 1918 must be taken into ac- 
count in estimating the present minimum of subsistence 
wage figure. The most comprehensive and reliable wage 
and cost of living investigations in this country are those 
made by the United States Bureau of Labor Statistics, 
under the direction of Boyal Meeker. The method of 
the Bureau's investigations is stated as follows, "It will 
become more and more essential as time passes that the 
decision of all questions involving the economic well- 
being of the laboring classes should rest, not on guess- 
work or on ex-parte statements, whether of employers or 
employees, but on the accurate, reliable and strictly im- 
partial results of investigations such as the industrial sur- 
vey."^ In 1919, Mr, Meeker stated the findings arrived 
at by the government investigations as follows: "Ameri- 
can families on the average are not fully nourished until 
their yearly income reaches $1,800. . . . The average in- 
come and the modal income both fall well below $1,600. . . . 
[These figures] do not mean that our working population is 
dying of slow starvation ; nothing of the sort. But they do 
indicate that the workers of America are obliged to live on 
a diet too restricted and monotonous for the maintenance of 
as high a degree of efficiency and health as ought to be 
maintained as a reasonable minimum. ' ' ^ This finding is 
substantiated by the bulk of reputable authorities in the 
field, and may safely be taken as the impartial, scientific 
facts of the case.^ 

For purposes of full clearness, it is necessary to 
relate the so-called living wage level to two other levels of 

1 Bulletin 265, United States Bureau of Labor, "Survey of Selected 
Industries in 1919," p. 24. 

2 Monthly Labor Review, Volume IX, pp. 7-13. 

3 See P. Douglas and F. Lamberton, American Economic 'Review, 
Vol. XI, pp. 409-426. 



Labor: Its Part in Production 123 

wage and life, — what may be called the poverty level and 
what may be called the comfort level. The poverty level 
is a demoralizing and devitalizing level. "Families liv- 
ing at this level receive charity in the form of gifts or 
free medical service or in other ways. Or if they do not 
do this they attempt to live on a level so low as to weaken 
them eventually to such an extent that disease inevitably 
overtakes them. ' ' Further, Parmelee, after an extended sur- 
vey of the statistics and records bearing on the problem, 
concludes, "In view of the above facts, as well as various 
others that might be cited, it seems reasonable to assume 
that the number of persons in this country receiving charit- 
able aid ranges from five to ten per cent., varying some- 
what according to economic and other social conditions. ' ' ^ 
Within the poverty level should be included those whose 
incomes are so low that although they do not resort to 
charity for subsistence, nevertheless exist under conditions 
which involve degeneration and distress. As Parmelee 
states, "We have plenty of evidence that the number of 
those who do not even reach the lower minimum standard 
of living is very great, probably exceeding ten per cent, of 
the population.*"^ 

For a group of several millions of people in the United 
States poverty of a sort which is devitalizing is a haunting 
fact. As a statement of plain scientific findings, the fol- 
lowing words by Hollander are directly to the point: 
"There are great bodies of people in country and in city 
who from birth have less than enough food, clothing, and 
sfhelter; who from childhood must toil long and hard to 
secure even that insufficient amount ; who can benefit little 
from the world's advance in material comfort and in 
spiritual beauty, because their bodies are undernourished, 
their minds are overstrained and their souls deadened by 
bitter struggle and want. These are the real poor of every 
community — the masses who, not lacking in industry and 
thrift, are yet never really able to earn enough for decent 

1 "Poverty and Social Progress," p. 103. 
ilUd., p. 106. 



124 Labor: Its Part in Production 

existence and wlio toil on in constant fear that bare neces- 
sities may fail. " ^ 

The ordinary working of competitive wage forces has 
not averted the menace of this poverty line. From a 
social and economic standpoint, the degeneracy and devital- 
ization which goes on steadily within these classes is a 
national liability of the severest sort. Economic science 
can find no sound laws or principles which deserve to 
stand in the way of eliminating the poverty line. Supply 
and demand, the wages fund, productivity, — any and all 
of the wage theories present no reasons wihy the poverty 
line is an inevitability. There is nothing unscientific in 
insisting that economics must concern itself with sentiment 
as well as with dollars and cents. The poverty depths are 
a challenge to the industrial order, and economic science 
must accept the poverty problem as a primary instead of 
a secondary one. 

The dehumanizing consequences of poverty are not a 
matter of guesswork but of scientific ascertainment. The 
death rate due to the vicissitudes of poverty is approxi- 
mately double that prevailing among the classes who have 
higher incomes. The infant mortality rates among these 
impoverished groups is more than double that of the nor- 
mal well-to-do groups in America. Perhaps even worse 
is the fact that the number of days of sickness in propor- 
tion to the number of days of health is between fifty and 
one hundred per cent, greater among the laboring than 
among the professional classes. The defective wages 
mean unfit diet, tenement crowding, scanty clothing, in- 
adequate mental care, frequent disease, an enfeebled 
physique and a harassed and haunted mind. From a 
strictly scientific standpoint, economics is compelled to de- 
liver a most scathing denunciation of the toleration of the 
poverty levels in American society.^ 

A third level has been mentioned : the minimum comfort 
level. This level necessitates an income from $300 to $400 

1 "The Abolition of Poverty," pp. 4-5. 

2 Hayes, "Introduction to Study of Sociology," pp. 98-99. 



Labor: Its Part in Production 125 

above tlie living wage level. An income within the com- 
fort range would allow for a positive measure of cultural 
development. It would make possible more reading, a 
better utilization of leisure hours, better educational op- 
portunities for children, more valuable forms of recreation. 
All in all it would be a positive instead of negative 
influence and would tend to elevate the worker and his 
family morally, mentally and physically instead of handi- 
cap him in all these ways. The minimum comfort level 
rests upon the encouragement of higher standards of 
living and puts a premium upon the development of per- 
sonality and the upbuilding of character. It frankly 
concedes that such a human development is a distinct eco- 
nomic asset and that the distribution of the national product 
should more and more be controlled and organized toward 
that end. 

No treatment of this subject would be accurate which 
failed to give full recognition to facts of excessive wages 
in some occupations and the extravagance and prodigality 
of numbers of wage earners. Here and there, powerful 
trade unions have exacted wage scales quite out of pro- 
portion to the normal, and certain employers, such for 
example as Henry Ford, have voluntarily given workers 
wages and bonuses decidedly above the average. Some of 
these extraordinarily high earnings are put to good use while 
others find their way into channels of conspicuous waste 
and extravagance. Moreover, the average family income 
does not give a clue to the extent by which certain fami- 
lies exceed the average and others fall short of it. Childless 
families might obtain from a certain income all the needs 
and comforts of life while the same income for families 
with a large number of children would necessitate the 
strictest economy amounting to privation, but for unmar- 
ried individuals without any dependents would allow for 
real prodigality and extravagance. When the family in- 
come is not derived solely from the earnings of the head 
of the household, but from other sources, such as from 
roomers or boarders, or from jobs held by sons or daugh- 
ters or wife, the total family fund is likely to be adequate 



126 Labor: Its Part in Production 

and to allow for some flourish and luxury. Well paid in- 
dividuals who have no one to support but themselves are 
for the most part the ones who flaunt silks and furs and 
fineries, and there are just enough of these individuals to 
make much show and create vivid impressions in the public 
mind. Methods of wage payment, as thus far contrived, do 
not give full recognition to these variants, but deal on the 
basis of averages. The wage groups, when brought side by 
side, in their general proportions, stand about as follows : a 
topmost layer of workers enjoy extraordinary incomes 
which allow for some degree of extravagance; a bottom 
layer of several millions of people are within the poverty 
line; the great run of unskilled labor barely comes into 
the minimum of subsistence level; and the group within 
the minimum comfort level, although possessed of many 
examples, nevertheless relatively to the other groups, is 
decidedly small.^ 

The status of the principle of "the standard of living as 
a wage base is therefore far from satisfactory realization. 
As will be pointed out more fully in a later chapter, fed- 
eral and state governmental endorsement of the principle 
has given it strength, and conspicuous progressive em- 
ployers have lent the weight of their authority to it. The 
responsibility of each industry for the payment of a rea- 
sonable living wage is safely on its way to general recog- 
nition. It sets the base below which the worker's income 
must not be allowed to fall. Above that base rate is room 
for the play of other factors of many kinds, a number of 
which are mentioned in the sections immediately follow- 
ing. The emphasis is unreservedly upon the human 
necessity of a living wage as a primary force. To quote 
the report of Ex-President Wilson's Second Industrial 
Conference in 1920, "Considered from the standpoint of 
public interest it is fundamental that the basic wages of 
all employees should be adequate to maintain the employee 
and his family in reasonable comfort, and with adequate 
opportunity for the education of his children. When the 
wages of any group fall below this standard for any length 

1 See A. Epstein, "Facing Old Age," Chapter on "American Wages." 



^ 



Labor: Its Part in Production 127 

of time, the situation becomes dangerous to the well-being 
of the state. No country that seeks to protect its citizens 
from the unnecessary ravages of disease, degeneration and 
dangerous discontent, can consistently let the unhampered 
play of opposing forces result in the suppression of wages 
below a decent subsistence level. Above that point there 
may well be a fair field for the play of competition in 
determining the compensation for special ability, for spe- 
cial strength or special risk (where risk is unavoidable), 
but below that point the matter becomes one of which the 
state for the sake of its own preservation must take ac- 
gpunt. ' ' 

Incentives 

The psychology of incentives underlies the invention of a 
number of widespread wage policies. The possessive in- 
stincts of the workers are stimulated by devices for gradu- 
ating wages in proportion to the effort of the worker. The 
piece rate method of payment rewards labor in proportion 
to the number of pieces of product turned out. The bonus 
method of payment starts with a base rate of pay for a 
given task, and adds to this base rate an increase in some 
ratio to the excess of production above the standard task. 
The setting of the standard task involves time study of 
the separate stages of the manufacturing process and a 
careful estimate of the amount of work which a normal 
laborer ought to turn out in a certain period of time. The 
bonus constitutes a reward for speeding up and for turn- 
ing out a product above the normal. The United States 
Bureau of Labor reported in 1904 that the average in- 
crease in production where piece rates are in vogue ranges 
around twenty-five per cent. Experiments with the bonus 
system have often increased efficiency from 100 to several 
hundred per cent. General experience would indi- 
cate that when rightly applied these two forms of finan- 
cial incentive are effective in securing an increased pro- 
duction. 

A financial incentive for regularity of attendance and 
for promptness has been effectively used, taking the fornj 



128 Labor: Its Part in Production 

of premiums in money. An increase in wage or a bonus 
award for long service with the company serves in 
many cases as an incentive to loyalty and a better spirit 
of workmanship. Many concerns have found it useful 
to introduce financial incentives for quality of workman- 
ship and experience has often shown that where a pre- 
mium is paid for workmanship which involves a minimum 
of spoiled product, there results not only a genuine pride 
of workmanship but an actual increase in the quantity of 
output as well. Many concerns find it advantageous to 
pay high wages as a deliberate policy, because the high 
I'ates are conducive to labor's loyalty and interest in 
work. Such concerns find that the greater efficiency of 
labor under high wages actually reduces the labor cost in 
production. 

The strategy of using financial incentives has frequently 
taken the form of supplementing the wage income with 
special money returns. Profit sharing, is an attempt to 
assign the workers a fraction of the net profits of the 
concern at certain periods. Although in carefully regu- 
lated experiments profit sharing has met with favorable 
results, nevertheless, it has led to an alarming number of 
failures and especially when it has been looked to as 
a substitute for a system of wage payment which the 
laborer could consider sound, it both has failed as a stimu- 
lant and has served to excite discontent and a feeling of in- 
justice among the workers. Many concerns encourage 
their employees to buy shares of common stock, the under- 
lying reason being the desire to stimulate a loyalty to the 
concern by virtue of the fact that the worker receives 
dividends from time to time, and any form of labor unrest 
which might interfere with regular dividends would be 
repugnant to the worker owning the stock. Of this policy 
it may briefly be said that the financial incentive often 
serves a good purpose, but cannot be depended upon to 
secure the loyalty of the worker unless all of the other 
essential wage and working conditions are sound and satis- 
factory. Welfare work has often been inaugurated for 
genuine philanthropic purposes, and often for purposes 



Labor: Its Part in Production 129 

of soothing and pacifying labor with attractive surface 
comforts without supplying the more fundamental necessi- 
ties which the laborer requires. Where the welfare work 
has come from the top down, and has not been devised by 
the joint wisdom of labor and capital, it has commonly 
given to labor the impression that it is a paternalistic 
program. Moreover, labor has figured that it is a paternal- 
ism at its own expense. Labor would prefer to have the 
cost of welfare work given in the form of an increased wage. 
Another type of supplementary remuneration is found in 
various thrift and insurance devices, often regulated in 
amount by the length of time the worker has been with the 
company, or by some act on the worker's part which is 
useful to employer and employee. All of these forms of 
incentives, supplementing the wage payment, therefore, 
may, when rightly handled, serve a good purpose by in- 
creasing the stake of the worker in the company. But 
most emphatically it must be remembered that they are not 
a substitute for a sound wage policy and that the prerequi- 
site to all of them is a satisfactory and scientific wage 
schedule. 

Bargaining Power 

A third group of wage influences is found in the rela- 
tive bargaining power of employer and employee. The 
worker has something to sell, — his labor. The employer is 
in the market to buy labor. The worker as seller wants 
as high a price for his labor as possible ; the employer wants 
to buy at a "bargain price." The laborer finds that if he 
refuses to work at the price offered, another man is stand- 
ing ready to take the job at the figure set, and glad to get 
the chance. As an individual, his bargaining power is 
weaker than that of the employer. 

A group of individuals, finding this weakness, determine 
to band themselves into a labor organization and to sell 
their labor collectively. Their bargaining power there- 
upon increases by virtue of the fact that if they threaten 
to refuse to sell their labor as a group because the wage 
offered is too low, the employer faces the prospect of being 



130 Labor: Its Part in Production 

unaT^le to carry on his business and fulfill his contracts. 
The theory of collective bargaining power rests upon a 
basis of historical facts, briefly stated by J, H. Hollander 
as follows, "This much, however, can safely be set forth: 
in those trades where an efficiently organized, intelligently 
directed trade unionism prevails, wages have 'either risen 
higher than they otherwise would have or have suffered 
less reductions than would otherwise have occurred. ' ' ^ 

However, scarcely one-half of the industrial wage earn- 
ers of the United States are organized. Hence for the sub- 
stantial portion of workers, the individual is still at the 
mercy of his inferior bargaining power. Obviously the forces 
of supply and demand operate with particular strength 
where individual bargaining prevails. Under collective 
bargaining, the workers hold the power to withdraw their 
labor from the plant en masse and under this threat the 
employer is pressed into the payment of an increased 
wage. The effectiveness of the potential threat varies 
greatly from employer to employer depending upon his 
temperament, or the state of his business, or the degree of 
his backing by other employers. If by temperament he 
is strongly self-assertive and intolerant of interference, he 
may fight it out with labor, even to the point of a protracted 
strike or lockout. If the state of the business is poor, if 
profits are low, and depression or loss stares him in the 
face, so that wage increases would ruin the business, he 
may use these facts to dissuade labor from exercising its 
collective bargaining power unreasonably. If other em- 
ployers are behind him, through employers' organizations 
of one sort and another, his relative bargaining power may 
be so enhanced as to offset labor's collective strength. But 
after due allowance has been made for these influences, 
the fact remains that labor's bargaining power tends to 
become greater when used collectively, and wages tend 
to be forced to higher levels. 

>" Under collective bargaining, the labor cost to the em- 
ployer is frequently, though not always, by any means, 
considerably increased. Labor cost inclines to go up not 
1 Abolition of Poverty," p. 55. 



Labor: Its Part in Production 131 

merely because a higher wage sum is paid out, but also be- 
cause the efficiency of the worker is sometimes severely re- 
stricted by the collective bargaining group. For example, 
in many cases bricklayers' unions have not merely pushed 
wages up but have laid down a maximum number of bricks 
which the worker is allowed to lay in one day. This maxi- 
mum is decidedly low in comparison with the possible 
efficiency of the bricklayer. "Wherever restriction of pro- 
duction is practiced at the same time that collective bar- 
gaining is used to push wages up the labor cost becomes 
abnormally great, and in the long run workers as well 
as employers are grossly injured. Collective bargaining 
used in such forms ultimately defeats its own purposes. 
The use of collective power to restrict production deserves 
sharp condemnation, for it is a source of loss to the 
nation and of waste and damage to both employer and 
employee. 

Yet mere condemnation of restriction of production will 
certainly not eliminate the fault. Restriction of produc- 
tion is the instinctive response of the worker to a number 
of painful facts in his industrial experience. One cardinal 
fact of this type is unemployment. The millions of work- 
ers who constantly stand in fear of irregular employ- 
ment, seasonal fluctuations, or periodical depressions are 
responding in the natural psychological manner when they 
seek to make the job last as long as possible. The job in 
hand is an immediate source of income; if it is lost, the 
hunt may be long and discouraging before a new one is 
found. It is inevitable that the worker should "make 
work" out of a present job if he expects to be laid off 
when it is finished. As long as the fear of unemployment 
is a dynamic force in the worker's experience, no amount of 
education, propaganda or condemnation can be expected to 
abolish his impulse to make his work last as long as possi- 
ble. Many other facts serve as causes in the "make work" 
tactics of labor. The unsatisfied instinct of workmanship, 
the stifled desire for self-assertiveness, the constantly 
curbed possessive impulses, the thwarted desire to act as 
a group, the general repressiveness of the economic en- 



132 Labor: Its Part in Production 

vironment over the instinctive demands of human nature, 
— all establish a psychological foundation for restriction of 
production. Frequently, the concrete forms of restriction 
are catalogued and written into a collective bargain be- 
tween a union and an employer. More often, the forms 
of restriction are unorganized and untabulated; they are 
simply the spontaneous resistance of human nature to an 
economic environment which has not been scientifically 
adapted to human nature. Collective bargaining through 
unions is not, as a rule, the cause of restriction of produc- 
tion; the basic cause is in the maladaptation between the 
economic organization and human nature. 

Collective bargaining power, when not perverted to harm- 
ful ends, is a real safeguard to the laborer. Without it, he 
is at the mercy of forces which frequently are not con- 
siderate enough of his needs and welfare. Without it he 
has no guarantee that his wages will come up to the sum 
which his productivity warrants; no guarantee that he 
can rise above the bare subsistence level, no guarantee that 
his share of the total fund of production will be equitably 
«''3ertained; no guarantee that unlimited supply and de- 
mand forces will not drive his wage down to harsh and 
intolerable levels. His group bargaining is his great safe- 
guard against unfair, inadequate or unscrupulous wage 
determination. However, the power which, when rightly 
used, is a safeguard of labor's legitimate interests, is, when 
used by unscrupulous or extremist leaders, capable of 
menacing the legitimate interests of the employer. The 
bargaining power of the employer is his safeguard against 
the excessive or unreasonable demands of labor, and this 
power often can be acquired only by the organization of 
several employers to cope with the organization of laborers. 
Organized bargaining power on both sides has been re- 
sorted to as the only practical safeguard against excesses 
by either side. This sets up a kind of balance of indus- 
trial power, and is not unlike the principle of the balance of 
power in international relations. It leads to a feverish 
effort to build greater and greater power on both sides, 
much as, internationally, the balance of power system leads 



Labor: Its Part in Production 133 

to a feverish competition to build armaments on an ever 
grearf;er scale. Collective bargaining is usually militant and 
threatening in its attitude, and involves a veiled threat 
of strike or lockout unless demands are met. It lacks a 
basis of confidence and co-operation between employer and 
employee. It is not an ideal form of industrial relation- 
ship, and probably not the ultimate form, but it occupies 
a very prominent place in the present stage of the evolu- 
tion of industrial relations and plays a large part in deter- 
mining the wage scales in present-day industry. 

Custom and Habit 

Habit and custom suggest a fourth group of wage fixing 
influences. Lines of work which custom accepts as carry- 
ing prestige and social esteem often command a relatively 
low wage. Examples would be found in the "white-col- 
lared" clerical workers, or in the teaching profession. 
Again, the customary standards of one locality often keep 
wages higher (or lower, as the case may be) than those of a 
neighboring locality. Variation of wages as between dif- 
ferent trades and occupations is in a large number of cases 
explainable by the custom and tradition of the lines of work 
involved. A Massachusetts Wage Commission has asserted 
that "wages among the unorganized and lower grades of 
labor are mainly the result of tradition and of slight com- 
petition." 1 Employers who were habituated to the under 
payment of sweated trades were sure that wages could not 
possibly be increased above the customary scale until the 
minimum wage laws came into play, defying custom, yet 
not raining the business. Habit and custom operate in and 
through all other wage influences. Orthodox ideas of wage 
figures, "which the business will bear" established notions 
of what constitutes "a fair day's pay for a full day's 
work," and current attempts to "adjust wages to pre-war 
levels" all illustrate the scope and force of custom in the 
setting up the wage scale. 

The groupings of wage influences which have been made 

1 "Report of the Commission of the Minimum Wage Boards," 
January, 1912, p. 18. 



134 Labor: Its Part in Production 

under the headings of standards of living, incentives, bar- 
gaining power, and habit and custom are not exhaustive in 
their scope, nor do they exclude the influences mentioned 
under the various theories of wages outlined at the begin- 
ning of the wages section. The primary gain from these 
groupings is to indicate that no one fixed, absolute prin- 
ciple is adequate to explain wages, and that the most ade- 
quate theory of wage standards is one which makes room 
for a combination of numerous and variable factors. 

To search for any one principle or law which will ac- 
count in full for the determination of wages is not only 
futile, but is a tendency to depart from the real facts of 
the industrial world. A large variety of factors are con- 
stantly in play, each exercising widely differing degrees of 
influence in different trades, occupations, and communities. 
Wages are the resultant of the multiplicity of forces. In 
actual bargaining there is a high degree of guesswork in 
ascertaining the proportionate influence of each factor. 
Much of the guesswork is capable of elimination by a 
frank recognition of the facts of the worker's life and an 
effort at scientific measurement along lines already sug- 
gested. A wage theory should be realistic, should fit the 
facts of economic life. The most realistic method of wage 
settlement is not a conception of some one wage law into 
which wage facts of all sorts and varieties must be made 
to fit, as into a straight jacket. The truly realistic key is 
a conception of the full list of wage forces, playing widely 
varying parts from instance to instance, combining in new 
and original forms, requiring in each individual case an 
estimate of its peculiar and unique grouping of all the 
forces in operation, and taking on new and differing de- 
grees of influence in national and international wage levels 
at various historical stages. At the same time, this plural- 
istic or group theory of wages has the distinct advantage 
of being genuinely serviceable because it keeps close to the 
evolutionary and dynamic facts of economic life. 

The basis of this theory of wages in actual economic con- 
ditions is admirably stated by one of the most influential 
labor boards in this country, the Railroad Labor Board, in a 



Labor: Its Part in Production 135 

decision in 1920 on the wage rates of approximately 2,000,- 
000 railway employees : * ' The board has been unable to find 
any formula which applied to the facts would work out 
just and reasonable wages for the many thousands of posi- 
tions involved in this dispute. The determination of such 
wages is necessarily a matter of estimate and judgment 
in view of all the conditions, a matter on which individuals 
will differ widely as their information or lack of it, their 
interest, situation or bias may influence them. ' ' ^ The 
Transportation Act passed by Congress in 1920 laid down 
as a guide in determining what wages would be "just and 
reasonable" the following major considerations: 

(1) The scale of wages paid for similar kinds of work 
in other industries; 

(2) The relation between wages and the cost of living; 

(3) The hazards of the employment; 

(4) The training and skill required ; 

(5) The degree of responsibility; 

(6) The character and regularity of the employment; 
and 

(7) Inequalities of increases in wages or of treatment, 
the result of previous wage orders or adjustments. 

Wages and Labor Efficiency 

Any considerable increase in the real wages of the masses 
of people depends upon an increase in the total productivity 
of the country. Labor may make gains here and there in 
squeezing out of the present fund of production some of 
the excessive gains which go to profiteers, but any sub- 
stantial progress in the form of more of the necessaries, 
comforts and luxuries of life is conditioned upon an ad- 
vance in the productive efficiency of the whole people. On 
this point, the careful statistical studies of W. I. King are 
authoritative. His conclusions are stated as follows,^ 
"Thus it would seem improbable that, with our present 
national productive power, any feasible system of dis- 
tribution could increase the average wage earner's income 

^Monthly Labor Bulletin, Volume XI., p. 101. 

2 "Wealth and Income of the People of the United States.'" 



136 Labor: Its Part in Production 

in purchasing power by more than one-fourth and this is 
an extreme rather than a moderate estimate. While such 
a change might or might not be desirable, it would, at 
least, work no startling revolution in the condition of the 
employees of the United States. The grim- fact remains 
that the quantity of goods turned out absolutely limits 
the income of labor and that no reform will bring univer- 
sal prosperity which is not based fundamentally upon in- 
creasing the national income." King's findings were based 
upon pre-war figures, A post-war investigation has been 
made by David Friday, in which the observation is es- 
sentially the same. "The practical conclusion that follows 
from all this is that the source of real wages must be 
found in production and not in a redistribution of the 
product of industry. 

"Those who had hoped to augment the laborer's real 
wages by making short shrift of the whole matter and 
adding to the laborer's wages what the entrepreneur now 
receives as profits, will be disappointed by this analysis of 
the situation. . . . 

"That a 20 per cent, increase in productive output is 
possible was demonstrated during the war. That the co- 
operation of labor is necessary to any such program is 
obvious. But the possibility of that co-operation was also 
demonstrated. Given an aim that appealed to the imagina- 
tion, that made labor an integral part of the body politic, 
it demonstrated its willingness to co-operate. But there 
had to be a worthwhile end, and there had to be recog- 
nition of labor as a factor equal to the other partners in 
the industrial life of the nation. ' ' ^ 

In other words, even though labor should plunge en- 
thusiastically into the task of increasing production in a 
measurable degree labor might have no assurance that a 

1 "Profits, Wages and Prices," p. 236. See, however, above, page 
131, for an analysis of the basic causes of restriction of production. 
It is necessary to realize clearly that the rational correctness of this 
finding cannot be expected to insure a transformation in labor 
behavior. Labor attitudes toward maximum production are the 
outcome of every instinctive and impulsive industrial influence as 
well as of appeals to reason. 



Labor: Its Part in Production 187 

due proportionate share of the increase would be forth- 
coming in the form of wages. Labor has had ample bitter 
experience in the past to satisfy its mind that there are 
altogether too many employers who would pounce upon 
labor's increased productivity, and endeavor to retain the 
lion's share of the increase. The only safeguard against 
this encroachment which has thus far proved reliable 
enough to command the widespread confidence of labor is 
collective bargaining through a powerful, organized labor 
group. The indispensable understanding in labor's mind 
before any material increase of total production may be 
looked for, must be that labor shall receive a just and 
proportionate share of the increase. Unless labor can be 
reasonably assured of this outcome, labor cannot be ex- 
pected to take part in the ideal of greatly heightened out- 
put. Many individual plants have experimented with such 
assurances, and have increased production in many cases 
by surprising amounts, but only because the individual em- 
ployer has been progressive enough to comprehend labor's 
point of view, and to offer assurances fitting the individual 
plant, which convinced labor that wages would constitute 
a fair and proper share of the increased product. The 
number of employers, however, who are unable because 
of traditional ways of thinking, to give labor such an as- 
surance is so great that on a national scale, the laborer 
declines to trust to their beneficence to dole out what labor 
would consider a fair share of the increased product. ~^ For 
the general run of laborers, dealing with a large proportion 
of employers, the only satisfactory assurance lies in labor's 
power to claim a fair share of the increase, through agencies 
of collective bargaining. -^Even though this agency may 
often make exaggerated demands, and appear obstinate 
and headstrong and unreasonable in its claims, neverthe- 
less the only sure recourse of labor is collective bargain- 
ing either in the form of works councils or labor unions, 
Democratic action in government or industry has grave 
faults, but the central necessity for the group method 
exists in industry as well as in politics, and the besetting 
sins of collective bargaining groups must be alleviated by 



138 Labor: Its Part in Production 

a more eo-operative attitude on the part of labor, capital 
and the public. 

Fully aware of these phases of labor psychology, Friday 
further concludes: "We have learned that it is possible 
to produce enough so that every class may have a decent 
standard of living. With this result realized, poverty will 
be abolished. This attainment is one of which nations 
have dreamed for centuries. No nation has been within 
striking distance of its realization before. If any national 
leader or any group can be found with the imagination and 
the courage to appeal to America on the basis of this 
motive, and with an adequate program, we shall see the 
most promising and worthwhile political and industrial ex- 
periment which we have tried in our national career. ' '^ 

Power 

It is true that labor's part in production is concerned 
with questions of function, of the job, of wages, of hours. 
But it is of deeper significance that all of these separate 
demands and individual movements are bound up with a 
central, pivotal movement, — one which comprehends the 
various individual claims, and integrates the thought and 
action of labor into a concentrated purpose. That con- 
centrated purpose is a new status in industry. The new 
status occupies the forefront of opinion and feeling among 
the laborers of the country. 

The transition to the modern industrial organization, 
which began in serious proportions during the middle of 
the nineteenth century, gave to the worker a status of ob- 
vious inferiority. He became a hired hand in the factory 
and railroad and mine, with no material control over the 
working conditions which decided the destiny of his life. 
The regime of machine production denied to the worker a 
share in the control of the raw product, or of the machinery 
for production, or of the rewards for work, or of the amount 
of work to be done per day, or of the conditions under 
which work had to be done. The labor problem now is at 
bottom an effort to win a share of control in all these 
1 "Profits, Wages and Prices," p. 251. 



Labor: Its Part in Production 139 

matters wliieh directly affect the worker's life. It has 
been said that ' ' The root evil of the present industrial 
order is that it affords to the ordinary worker in industry 
no means of expression and no chance of responsibility 
or active citizenship. U^. The labor movement is primarily 
committed to the removal of this root evil, and to the 
substitution of a status of influence, responsibility, and 
expression. 

The World War served to accelerate the movement. The 
worker was definitely told that he counted and counted 
vitally in winning the war. The workshop was painted 
as the second line of defense, and no less in importance than 
the front line trench. The worker was told that the war 
was a struggle to make the "world safe for democracy." 
In his mind and his experience, the world often nearly 
coincided with his workshop, and to him, therefore, the 
slogan meant that the war was to make ''industry safe 
for democracy." Such hopes stimulated the worker's 
instinctive dispositions of self-assertion and self-expres- 
sion, and set loose a tide of human energy in the direction 
of more control over the machine regime. Ex-Secretary 
of Labor Wilson hinted at the phenomenon in these words : 
"Both sides must realize that money and hours are but in- 
cidents in the fight. . . . The real thing which is being 
fought over by employers and wage workers is self-respect. 
The employer feels that he cannot give up for fear of los- 
ing his self-respect and prestige; while the wage workers 
feel that they cannot give up for fear of losing their self- 
respect. . . . When employers will give as much thought to 
studying the sentiments which control life as to studying 
materials, machinery, law, and other factors, then we shall 
be on the road to industrial peace." 

This inner change which is affecting society goes to the 
heart of the matter. Surface demands for new wages, 
new hours, new treatment are concrete signs of the funda- 
mental thing itself, — a new assertion of the worker's 
thought and power. In this respect there has been an 
institutional and spiritual change going on in social and 
industrial life. The mechanical facts of the working world 



140 Labor: Its Part in Production 

have in great measure outrun the traditional ideas, prin- 
ciples, and organization for their direction and control. 
The facts of automatic machines, uninteresting toil, fatigue, 
long hours, bossy foremen, unreliable wages, advertised 
profits, — these are no longer taken care of by the tradi- 
tional ideas of individual action, unrestricted managerial 
power, unbridled freedom of contract, individual bargain- 
ing, non-consultation between employer and employee, and 
"business is business." At least, they are not cared for to 
the satisfaction of the worker. Out of this maladjustment 
between the mechanical facts and the traditional principles 
of industrial government has grown a vivid awakening of 
instinctive energies. They are energies which crystallize 
into new principles of industrial control, — of industrial self- 
control. The outcome of the experience has been the formu- 
lation of a new status for the worker. The newly projected 
ideas call for group action, modified managerial power, 
collective freedom of contract, organized bargaining, joint 
conference between employer and employee, and ''business 
is self-expression." Whatever individuals may think of 
the soundness or viciousness of the new conceptions, they 
are in our midst at any rate, and are the real influences 
to be reckoned with in any serious reflection upon labor's 
part in production. 

A great obstacle in the path of these instinctive aspira- 
tions for a new labor status is the defects, excesses, and 
abuses in labor organizations themselves. Their frequent 
abuses of power; their strikes in defiance of the public 
need; their walking delegates, union organizers and union 
leaders often lacking in self-discipline and in a due regard 
for the legitimate interests of employers and the public; 
their occasional acts of violence; their reluctance to sur- 
render policies for restricting production; their tendency 
to harass business with a flood of limitations, regulations 
and by-laws; their rash demands from time to time in col- 
lective bargaining conferences; their occasional repudia- 
tion of contracts with employers, — all need to be brought 
under control before the public or employers will be will- 
ing to trust labor with the coveted status of power. All 



Labor: Its Part in Production 141 

of the excuses and explanations for sueh. abuses which can 
be conceived of by the best labor minds are practically 
futile as a means of convincing the rest of the economic or- 
ganization that a new status of labor power is safe. The 
highest ambitions of labor will certainly be opposed and 
thwarted in countless ways by the public as well as employ- 
ers, until labor accepts seriously the obligation to eliminate 
the excesses and abuses, which are now all too prevalent 
in labor organizations.^ 

Environment 

The environment of the laborer comprises all the sur- 
rounding influences upon his body and mind. Within the 
economic environment the worker spends from one-third 
to one-half of his waking life. The influence of this en- 
vironment upon his moods, his bodily health, and his human 
well-being is prof ound. '-Mjood wages without a favorable 
environment are futile. Reduced hours in unsanitary sur- 
roundings are of little avail. More stable employment if 
the employment conditions are unsafe for life and limb is 
without real gain. 

"What is involved in environment? What is at stake? 
For one thing, the safety of the worker. In a recent ad- 
dress, the President of the American Society of Safety 
Engineers put the case comprehensively: 

"There are killed accidentally in the United States each 
year about 70,000 people, or nearly 20,000 more than the 
total battle deaths and subsequent deaths from wounds 
in our army during the entire European War. 

* ' Of the wage earners in this country, over 700,000 each 
year lose members of their body or are so seriously injured 
by accidents as to be incapacitated for an average of four 
weeks each. 

"The total economic waste from casualties in the United 
States amounts to probably $800,000,000 per year, with un- 
told privation and suffering entailed. 

1 See below, Part III, Economic Adaptation, for a detailed con- 
sideration of the dangers and benefits of the relative conceptions 
and of the policies and practices of capital and labor growing out 
of them^ 



142 Labor: Its Part in Production 

"About 90 per cent, of this yearly casualty expense, or 
$720,000,000 is caused by accidents that are preventable 
by engineering provisions. It is not claimed that even a 
large portion of the total casualties are preventable by en- 
gineering problems — only 7 per cent.; but it is this 7 per 
cent, which is preventable by engineering revision that 
causes the $720,000,000 casualty expense." 

With the development of high power and high speed ma- 
chinery, the network of electric currents, complicated 
chemical processes, the use of compressed air, the presence 
of dangerous gases, acids and dusts in productive proc- 
esses, extremes of temperature and humidity, improper 
ventilation and unsanitary surroundings, night work and 
inadequate lighting, — with all these accompaniments of the 
modern economic process, the hazards and risks to the 
worker have mounted high. The highest death toll is ex- 
acted in the mining industry, with railroading, electric light 
and power industries ranking in close proximity. 

For the most part, a remedy for such hazards has come 
through legislation, state and national. Labor unions have 
brought pressure to bear, and a Safety First movement 
voluntarily adopted by employers has accomplished much. 
However, it remains true that for a considerable portion 
of industrial establishments, considerations of safety and 
health have proved to have only a secondary appeal. For 
that portion, legislative compulsion is the only adequate 
guarantee of even minimum safety and health conditions. 

Many pioneer employers have gone far beyond consid- 
erations of mere safety and health and have set about 
making the working environment positively attractive, 
comfortable, stimulating. The plants are surrounded with 
well-kept lawns or beautiful parks. Landscape and build- 
ing architecture become an economic art. Carefully painted 
interiors, neatness and cleanliness in the care of build- 
ings and the arrangement and upkeep of machinery, abun- 
dant window space, scientific shading and illumination, a 
medical staff with doctors, dentists and psychiatrists, 
hospital and dispensary facilities, playgrounds, gardens, 
rest rooms, libraries, company stores, gymnasiums, night 



Labor: Its Part in Production 143 

schools, even universities, — ^these are a few of the improve- 
ments of environment which, all or in part, are taken up 
already by an imposing list of companies.^ The plan in 
such companies is linked with considerations of productive 
efficiency, workers' comfort, plant morale and loyalty, and 
a general spirit of happiness, prosperity and contentment 
in the whole working program. The gap between such best 
kept plants and the worst kept plants is startling and sug- 
gestive. 

An important consequence of an environment of this im- 
proved type lies in the fact that it offsets in a real measure 
the monotonous and fatiguing effects of the production 
process. The handling of repetitive machinery may be 
made less monotonous by surrounding the operator with 
pleasant and stimulating factory accommodations. The 
fatiguing tendencies of the length of the work day are in a 
measurable way reduced by clean, artistic, healthy work- 
rooms. The spirit of the worker cannot rise above the 
tone of the plant yards, the lighting system, the mechanical 
arrangements. But if the laborer has a pleasant place to 
work in, his spirit, interest, morale and efficiency tend to 
improve. This outcome is broadly stated by R. A. Spaeth in 
these words: "When working conditions are standardized 
and we have the best of light and heat and ventilation; 
when all workers, men and women, have recess periods 
and properly adjusted, comfortable chairs ; when plants are 
equipped with cafeteria in which workers buy an occa- 
sional plate of soup instead of the more popular pie and 
ice cream; when the labor unions and managers alike in- 
sist upon physical examination of all employees; when job 
analysis and tests for physical, physiological and psycho- 
logical fitness once get on speaking terms ; when the indus- 
trial engineer stops fooling himself by comparing task 
setting with astro-physics and appreciates that his open 
sesame is not the stop-watch but the square-deal — ^then 

1 Corporations which have tried out these constructive devices are 
such as the National Lamp Works, the National Cash Register 
Company, the Goodyear Tire and Rubber Company, the Endicott 
Johnson Company, the Eastman Kodak Company and the Proctor 
& Gamble Company. 



144 JLahor: Its Part in Production 

and not till then, will the question of fatigue no longer 
be of such moment as it is generally considered. ' '^ 

In the broadest sense of the word, the economic environ- 
ment covers pretty much the entire content of the work- 
er's experience while he is on the job. For this reason, 
the environment serves as a stimulus to a wide variety of 
instincts in the worker's makeup. The financial instincts 
which are encouraged by various devices have already been 
mentioned under the section on wages and financial in- 
centives. It is necessary now to consider some of the 
non-financial incentives which enter into the worker's in- 
stinctive behavior. The following list of non-financial in- 
centives is by no means complete, but should be suggestive : 

1. An incentive to devotion to the laborer's duties is 
found in giving the laborer information about the pro- 
ductive process. Standing at his one machine, making but 
one isolated, unrelated part of the finished product, the 
worker attaches little significance to his operations. What 
is it all about ? He does not know. But along comes an in- 
dustrial engineer to draw up diagrams and charts which 
present vividly and clearly to the worker the part which 
his individual touch plays in the formation of the finished 
article. Perhaps a moving picture of the whole manu- 
facturing process is made and presented to an audience of 
workers. Talks by executives are used to explain the 
scheme of manufacture. The worker is thus able to dis- 
cover the ultimate meaning and significance of his work. 
' ' Interest in a thing may be developed by means of extend- 
ing information about it. . . . In applying this in indus- 
try, one would tell the employees many things about the 
business, soaking them in facts to the point of saturation. 
... To inculcate a deep affection and loyalty toward the 
firm, give information about its beginnings and growth."* 

From a thoroughly practical viewpoint as an indus- 
trial engineer, C. E. Knoeppel states, "Wherever far- 
sighted executives have widened the vision of their work- 

^ Industrial Management, May, 1920, p. 411, 

2 H. D. Kitson, Journal of Political Economy, Volume 28, pp. 
332-336, 



Labor: Its Part in Production 145 

men by explaining the relation of their work to the whole 
plant, a better and more nearly normal relationship has 
followed."^ 

2. Another incentive has been discovered in the practice 
of frankness with the workers about the hitherto concealed 
facts of the business. Government representatives enlisted 
the support of the I. W. W. lumbermen of the Northwest 
during the War by having the owners open their books 
and show the costs and profits of the business. A number 
of concerns voluntarily take leaders of the workers into 
their confidence on the ups and downs of the business, and 
this factor of candid consultation, and frank give and take 
of information about the profit and loss phases of the 
company policy establishes a mutual confidence and under- 
standing which serves as a powerful incentive to loyalty 
and interest on the part of the worker. 

3. Incentives are possible only when the worker feels 
that his new interest in the enterprise will not be ex- 
ploited to the undue selfish advantage of the employer. As 
is pointed out by Tead and Metcalf , ' ' There is, finally, the 
fear of exploitation if interest in work is pushed to a point 
where the employer gets a much larger proportionate re- 
turn for increased product than the worker. . . . The 
arousing of interest is not synonymous with efforts to * speed 
up' production, to cut wage rates, to increase profits. At 
that moment when workers feel they are being tricked into 
interest in work in order that their employer may get added 
returns, the game will be up with the employer." One of 
the surest ways in which the impression of trickery can 
be given is the all too prevalent device of cutting piece 
rates when an increase of production takes place. If the 
worker is satisfied that a proper share of the increased 
output wiU come his way, there is something to fire his 
imagination. The integrity and squareness of the employer 
is of itself a genuine non-financial incentive. 

4. Stability of employment is a loyalty incentive when 
the worker sees that the employer is concerned with his 
interest to the extent of making every effort to eliminate 

1 The Nation's Business, April, 1921, p. 17. 



146 Labor: Its Part in Production 

seasonal shut-do-^Mis, and to keep going, even if only on 
part time, when business is slow. The worker has a reason 
for a reciprocal attitude toward the emploj^er. Loyalty to 
the worker in the form of maintaining a steady job be- 
gets loyalty to the employer in the form of interest in the 
job. To secure this incentive, management must convince 
the worker that it is doing its best to give him an unin- 
terrupted chance to earn a lining. 

5. Rivalry is stimulated by posting the records of pro- 
duction for individuals and for groups. "When men can 
see their efficiency rated side by side with that of their 
fellow workers, it becomes a matter of pride to come near 
the head of the list. Moreover records which indicate the 
quality of the finished product and the amount of spoiled 
goods tend to foster a real pride of craftsmanship. An- 
other form of record gives the worker his comparative 
eflieiency to-day and a year ago to-day, with the result 
that he tends to take pride in progress in his skill. 

6. Fitting the worker to the job by intelligence tests, 
ability tests, job specifications studies, and efficiency rat- 
ings, makes possible a harmony between the human factor 
and the machine factor, which tends to heighten interest 
in the job. In the first flush of enthusiasm for psychological 
tests, experts overestimated their value considerably. Their 
usefulness is thus far confined to certain highly specialized 
tasks, such as clerical work, inspection tasks, salesman- 
ship, and tasks where acuteness of hearing or vision are of 
vital importance. The tests themselves, such as the Binet, 
the army, and special industrial forms, are in a far from 
completed shape for full industrial applications. The 
correlation between tests and subsequent showings of effi- 
ciency indicate that the tests are not a sure indication of 
trade ability, but at most point to a probable efficiency or 
inefficiency. Hence they have to be used with wide leeway 
for judgment and common sense on the part of the em- 
ployer. Then effective use requires administrators who 
have had special psychological training.^ Purely psycho- 
logical tests need to be supplemented by physical, medical 

iH. D. Kitson, School Eevieic, Volume XXIV, No. 3, March, 1916. 



Labor: Its Part in Production 147 

and physiological tests to discover the endurance of the 
worker under the working conditions of the occupation in 
which he is to be placed.^ 

7. Transfer and promotion are practicable aids to sound 
labor incentives, Henry Ford states that the repetitive 
machinery of automobile manufacturing would drive the 
workers crazy unless they were given variety at right in- 
tervals by transfer from one type of machine to another, or 
from one department to another. Transfer thus serves to 
alleviate monotony. Again, if a worker is found inefficient 
at one type of work, the scientific solution is proving to be 
to try the man out at other types until he gets the right 
sort of task for his peculiar nature. If he is at odds with 
the foreman of one department he may be transferred to 
another foreman. These policies secure the confidence of 
the worker and are a substitute for a former policy of 
discharge the instant the man proved incompetent. At 
each job held, efficiency reports may be made, based on 
piece-rate records, quality of work, judgment of foremen 
and superintendents, character traits, attitude toward 
work, etc. These ratings can be used from time to time 
as the basis of promotions.^ "Many organizations lose a 
considerable degree of the enthusiasm and zeal they might 
command by failing to make it apparent that they will 
recognize merit and advance the ambitious. . . . Any trans- 
fer or promotion plan which is to be permanently sound 
should, therefore, meet this test : Does the plan stimulate 
and draw out the desire of people to be creative, to be in- 
terested in their own activity, to excel, to win approval, to 
develop in power of self-expression ? " ^ 

8. A great number of employers have set up organ- 
ization machinery which invites and encourages the sug- 
gestions, viewpoints, and opinions of workers. The de- 
vices of labor representation are various in kind, but in 
all their variety, are based upon the value of evoking the 
mental activity of the workers. Joint conference, consulta- 

1 R. W. Kelley, "Hiring the Worker," pp. 91-97. 

2 lUd., Chapter VIII. 

3 Tead and Metcalf, "Personnel Administration," pp. 228-235. See 
also, R. A. Spaeth, Industrial Management, March, 1920, pp. 213-217. 



148 Labor: Its Part in Production 

tion, discussion, all serve to clear up misunderstandings, 
to create a new feeling of dignity and self-respect on the 
part of the worker, to develop a sense of responsibility and 
self-control, and most important of all, to build up a feel- 
ing that the interests of the worker are one with the in- 
terests of the employer. 

9. The morale of the workers has been elevated by the 
improvement of the environment of the workers. Attrac- 
tive homes, hospital care, recreational facilities, pleasant 
factory conditions have their psychological reactions upon 
all the instincts of the worker. By encouraging a psycho- 
logically abundant life, the worker develops a higher per- 
sonality and simultaneously proves a steadier and higher 
material efficiency. 

10. "Men must get the feel that they are working for 
efficient managers if they are going to be interested in 
increasing production. ' ' ^ 

Especially must the workers feel that the management 
is intelligently and scientifically handling the personnel side 
of the! organization. To quote Meyer Bloomfield, ''When 
everything that present-day science can suggest in the way 
of improving technical efficiency in systems of cost keeping, 
equipment, machinery, and material has been adopted, the 
biggest of all industrial problems remains to be faced. 

"As we have seen, this is the problem of handling men. 
Every awakened employer knows that managing employees, 
selecting, assigning, directing, supervising and developing 
them, is the one phase of management which is most diffi- 
cult and complicated. ' ' ^ 

To perform this important function, a new profession 
has come into being within the last few years, that of em- 
ployment management or personnel administration. The 
manager of this department of the business conceives of the 
human factor as a problem calling for scientific analysis of 
every phase of the employment relationship. The conse- 
quent good-will and mutual understanding are the results 
of the incentives aroused in the laborer 's mind. 

■i^ Survey, March 5, 1921, p. 817. 

2 Kelley, "Hiring the Worker," p. 9. 



Labor: Its Part in Production 149 

This list does not in any sense exhaust the non-posses- 
sive incentives possible in the processes of production. 
They illustrate a number of the possibilities. There are 
60 many things which count in the worker 's life besides the 
amount of his income that economic principles based upon 
the assumption that the laborer is a one-motive being, — and 
that motive purely mercenary, — have gone far astray. The 
non-possessive instincts, when properly called out, build up 
a better balanced life for the worker and supply the em- 
ployer with a producer whose heart is in his work. 

The Mind of the Worker 

The following description of labor's ideas is only a de- 
scription, not an argument. The purpose is to picture the 
ideas as accurately as possible without condemnation or 
approval. Moreover it would be false to claim that any 
single set of ideas prevails uniformly throughout the labor 
group. However, after full allowance has been made for 
the variations of opinion and extremes of radicalism and 
conservatism which exist throughout the labor world, there 
is obvious a strong degree of likemindedness among the 
workers. This likemindedness is particularly impressive 
in that section of the labor group which is dynamic, — 
that section which believes in change for the better and 
which in one degree and another is constantly bringing 
pressure to bear in favor of economic change.^ 

First of all, in labor's mind, management is inefficient. 
The notion that management has any magic capacity for 
high efficiency is rudely dismissed. In all but exceptional 
factories the workers see in the course of the everyday 
tasks constant illustrations of management's blunders. 
They see no small number of ways in which machinery 
could be better arranged, delays avoided, waste elimi- 
nated, good-wiU stimulated, and better production se- 
cured. In the past, labor's suggestions and ideas on such 
matters have too often been spurned by maneigement. * ' An 
employer will tell you in one breath that he will stand no 

1 See Samuel Gompers's "Labor and the Common Welfare," also 
"Labor and the Employer." 



f\n^^V' 



150 Labor: Its Part in Production 

interference with 'his' business, and in the next that his 
employees take no interest in that business. Of course they 
don't. They haven't any interest. They are unconsulted 
outsiders. . . . What incentive have wage earners to take 
a personal interest in the problems of industry, when no- 
body asks their advice, and everybody resents it?" In 
many of the affairs of labor, the foreman stands in the 
laborer's eyes for the whole of management. The foreman 
is management's immediate representative on the ground. 
"At any rate, the worker is not to be blamed if he con- 
siders his driving foreman, or that grouchy gate police- 
man, or that mean-minded paymaster, or his pompous clerk 
quite as fully and as properly a representative of the 
company's real purposes as the solicitous employment 
manager or the friendly nurse. "^ The workers see no rea- 
son why the management should not supply "better jobs 
and steadier jobs, less tiring jobs, jobs whose human service 
is better understood, jobs with a better chance to enjoy the 
satisfactions of their doing, without these being lessened by 
a grasping foreman representing an unknown employer."* 
The foreman, the boss, the paymaster, all stand for the 
management in the eyes of the laborer, and their arbitrari- 
ness, or unreasonableness, or blindness, or incapacity, or 
stupidity represent the qualities of the management. Fur- 
ther than this, labor nurses the idea that management is 
guilty of one great inefficiency which is almost criminal, 
namely, the inefficiency represented in unstable employ- 
ment. That management should boast of marvelous skill 
and efficiency and at the same time be unable to avert 
shut-downs, seasonal tie-ups, periods of depression, indus- 
trial breakdowns following overproduction appears to 
labor to be proof of inexcusable incompetency. Labor be- 
lieves that such phenomena appear largely because of 
management's consideration of "profits first." In this 
attitude, labor is encouraged by industrial engineers 
and experts, whose constant complaint is that a large part 
of production is not more than fifty per cent, efficient. 

1 Whiting Williams, "What's on the Worker's Mind?" p. 290. 
illid., p. 317. 



Labor: Its Part in Production 151 

There is consequently a strong effort on the part of lahor 
to ally itself with the engineers and their philosophy. 
Thus, growing out of experiences year in and year out, 
labor has come to feel that management has no monopoly 
upon the knowledge of productive efficiency and that in 
many problems of the workshop labor is as wise as manage- 
ment. Reverence and awe for management as a genius 
of masterful efficiency has been shattered. 

Secondly, in labor's mind the owners of property are 
to a large extent engaged in the game of getting something 
for nothing. Labor does not entertain the socialist doc- 
trine that ownership is not entitled to an income. Labor's 
idea is that a large part of the income which ownership 
actually wins is undeserved, unearned, and excessive. The 
great prominence given to the facts of profiteering in recent 
years has accentuated this impression. Moreover, labor 
believes that this profit motive of property owners, being 
carried to an extreme, is the cause of a large proportion of 
industrial woes. As things stand, labor conceives that in- 
dustrial organization is for profit instead of for use, for 
dividends instead of for production or service. "There is 
a general conviction among thoughtful workers that the 
present world works badly; that unemployment, poverty, 
ignorance, social injustice are things which intelligent con- 
trol and ordinary good human intentions could prevent if 
only there was a will and the desire that they he pre- 
vented."^ The owners are thought to have a primary con- 
sideration constantly for profits and only a secondary, a 
remotely secondary consideration for labor's best interests. 
The owners are charged with admitting only a minimum 
obligation or responsibility to labor. In turn, labor feels 
no strong sense of obligation or responsibility to owners. 
The weak loyalty of labor toward the owners is more than 
matched, so labor thinks, by the disloyalty of owners 
toward labor. It is an apt fi ^ure of speech that the cor- 
poration has no soul. The legal precept fits the moral fact 
of the case, in labor's eyes. The assumption which has 
been traditional since the days of Adam Smith that the 
iF. Tannenbaum, New Republic, Vol. XXIII, p. 172. 



152 Labor: Its Part in Production 

incidental by-product of profit seeking is always some 
good for the community finds no credence. Labor has 
seen too many examples to the contrary. Moreover, 
ownership needs not boast that profits are a reward for 
managerial ability. Labor asks, "Do managers receive the 
profits?" Obviously not. Managers receive a salary. 
With all these notions, the awe of property dies. Rev- 
erence for ownership as something sacred and religious 
passes out. "Certain ideas one believes to be knit into 
the fiber of the people. Suddenly they fall away — out- 
worn shells. . . . Reverence for the gentry, for the privi- 
leged, for the idle, has withered. With the idea gone, the 
institutions built upon it go. . . . In my opinion, this 
change is the most profound in its grip on instinct, the 
most far-reaching in its consequences of any. All other 
changes wait on that, and follow from that."^ The in- 
stincts of labor refuse to pay homage to the acquisitiveness 
of property. The spirit of the workers ceases to be afraid 
of the inalienable and immutable principles of profit mak- 
ing. "A growing proportion of mankind believes that 
industry should be managed primarily for those who work, 
not for those who own.^ It is natural under the circum- 
stances that labor should get the notion that the owners of 
the property are unsympathetic. To believe that the busi- 
ness is a partnership between labor and capital is difficult, 
and the outcome of the whole matter is that "those who 
work are fighting those who own. The workers no longer 
think that the shareholders are wiser than they. ' ' Labor 's 
ideas are by no means complimentary to capital owners. 
They are exceedingly harsh and critical, and all the more 
so, because of the instinctive drive behind them. 

In the third place, labor thinks of the market, the whole 
organization of buying and selling commodities, as some- 
thing rigged and manipulated by obscure strategists. In 
selling his labor as an individual to an employer a laborer 
feels that he is at a disadvantage ; and as a consumer in a 
grocery store or butcher shop, he gathers about the same 

1 Arthur Gleason, "What the Workers Want," p. 251. 

2 See R. H. Tawney, "The Acquisitive Society." 



Labor: Its Part in Production 153 

impression. He conceives a long line of superfluous middle- 
men, an army of price boosters, cliques of hoarders, and 
parties to price agreements; and matched against the wits 
of such an array of market manipulators, he feels helpless 
and inadequate. In his' mind the whole process is not 
maintained primarily for the sake of serving the labor con- 
sumer but for the sake of lining the pockets of acquisitive 
dealers. However unfair such a conception may appear to 
some outsiders, it is beyond dispute that such a conception 
is widely held among laborers. 

In the fourth place, labor conceives of finance as some 
secret, far-reaching process of scheming. The institutions 
of banking, speculation, exchange, credit, and Wall Street 
appear as a conspiracy of interlocking directorates, secret 
understandings, and mysterious quiet powers which hold 
a whiphand over the whole productive organization. The 
railroad brotherhoods brought charges that a gigantic con- 
spiracy of big banks deliberately fostered the post-war 
business depression for the sake of drawing the teeth out 
of labor's war-gained powers. The House of Morgan is 
a by-word for the subtle and dangerous. Labor believes 
that it detects financiers as the powers behind the throne 
in most big labor controversies. Strikes in the steel, coal, 
and railroad industries have shown up, so labor is con- 
vinced, the big bankers interested in those industries as the 
real antagonists. The craft and strategy which labor at- 
tempts to overcome has its source in the shrewdness and 
sagacity of these silent financial directors of the industrial 
life of the nation. This is not to deny that the lending of 
money, and the protection of deposits is an important 
economic service. Labor simply asserts that the terms 
upon which the service is rendered bodes labor no good 
and unduly restricts and shackles productive enterprise. 

Fifth, labor believes that the law is not on its side. It 
believes that the law has all too often been unfair. In- 
junctions, court decisions, restraints from picketing, and 
from boycotting, assessment of damages, limitations of 
rights,— these are but a few of the methods of the law 
which give labor an unfortunate position. "From tim^ 



154 Labor: Its Part in Production 

to time, American workingmen have also raised their 
voices, but ineffectually, in favor of the simplification of 
our legal system. They have protested against the legal 
technicality which American lawyer legislators have de- 
lighted in inserting into the statutes and the rules govern- 
ing court procedure. They have also protested ag^ainst 
the emphasis which the legal mind places upon precedent, 
because precedent is necessarily a handicap upon any class 
struggling upward toward a plane of equality with other 
classes. "1 Moreover the favorite doctrines of the law such 
as the natural and inalienable rights of private property, 
individual liberty, free contract, and free competition, run 
at cross-purposes with the instinctive desires of labor. 
If the labor movement means anything, it means a denial 
that private property has rights which are superior to 
personal rights, and that private property is above and 
beyond restriction and restraint. It means, too, that indi- 
vidual liberty for an employee is a mockery and that unless 
the doctrines of individual liberty are supplemented by 
new doctrines of group liberty and unless the individual 
bills of rights can be supplemented by group bills of rights, 
the word liberty cannot mean much to labor. In labor's 
mind freedom of contract means the freedom of the 
employer to pay as low a wage as possible and exact as 
high a working output as possible. The law is not con- 
cerned with the problem of whether such freedom of con- 
tract results in inadequate wages or excessive fatigue. So 
long as freedom of contract exists the law does not worry 
greatly about the consequences. Hence, the law in labor's 
mind has not been brought up to date. The courts stand 
as a bulwark for the protection of property rights, but 
in labor's eyes are exasperatingly indifferent to the human 
rights of labor. The sacred prestige of the law comes into 
serious question. The necessities of the worker who spends 
his eight or ten hours at a machine are direct, simple, and 
clear. The laborer feels them often blindly, instinctively. 
He knows the consequences of monotony and of fatigue, of 
wage rates and bad foremanship, of industrial peace and 
1 F. T. Carlton, "Organized Labor in American History," p. 200. 



Labor: Its Part in Production 155 

industrial war. They are close realities which fire primi- 
tive instincts and set off rugged impulses. Traditional 
rights, legal conceptions, court doctrines which thwart 
these direct and simple instinctive necessities crumple in 
the conflict. The mechanistic facts of the shop brush 
aside the elaborate legal taboos and roughly tear down the 
shrines of judicial idols which fitted the facts of life a 
century ago but which so far as the laborer can see are 
grossly out of joint with the facts of life to-day. i 

As a sixth consideration, labor does not feel that the 
public is an active ally. As an impartial arbiter of clashes 
of opinion, and of industrial struggles, the public seems pri- 
marily interested in getting the trouble settled at any cost. 
Industrial peace at any price is the foremost consideration 
and if it is necessary that justice to labor be sacrificed some- 
what the public is not greatly alarmed at the sacrifice. 
Labor conceives that the public is more interested in peace 
than in a square deal to labor. Moreover, by the very na- 
ture of things the labor movement feels on the aggressive, 
whereas employers are on the defensive. In most cases 
of antagonism the sympathy of the onlooker instinctively 
goes out to the defender. In industrial affairs, labor, be- 
ing on the aggressive, makes the attack, and for obvious 
psychological reasons, thereby tends to alienate the sym- 
pathy of the "long-suffering public." Labor therefore 
considers itself justified in pushing ahead even though it 
may necessitate some jostling of the complacent public. 
Labor's justification for its militancy and aggressiveness 
is the natural instinctive outcome of its feeling that it is 
an oppressed class. Labor sees it a duty to shake things 
loose and win progress in spite of the lethargy and inertia 
of the public. In this effort labor finds itself at a disad- 
vantage because the information upon which public opinion 
is based comes from newspapers which to labor's mind do 
not present labor's side of the case fairly. Labor thinks 
it has no way of getting its case outlined clearly in the 
eyes of the public, and consequently the voice of the public 

1 See E. F. Hoxie, "Trade Unionism in the United States," Chap. 
IX, also T. Veblen, "Theory of Business Enterprise," pp. 328, 342, 



156 Labor: Its Part in Production 

is far from the voice of God, This set of ideas is of 
course not a matter of wilful disrespect, but is an instinc- 
tive rationalization with antecedents in the hard-felt inter- 
ests and impulses of the workers. 

What, then, is labor's opinion of itself? For one thing, 
labor feels that it is doing as well as it should be expected 
to do under the circumstances. Granting abuses here and 
there, and bad leaders occasionally, labor nevertheless con- 
siders that it is doing as well as any incipient democracy 
has done in days gone by. But more than this, labor feels 
that heaven helps those who help themselves. Economic 
salvation lies in self-assertion. Self-help is to be found 
in self-determination. It is a duty to be discontented with 
conditions which are inimical to the highest progress. 
Complacency and contentment are for the soft and indo- 
lent. It is a crime to be a slacker and refuse to face the 
responsibility of winning a better status for labor group. 
In carrying out this militant attitude what does it mat- 
ter if real pressure comes from among the minority of the 
labor group? Progress has always come from the work 
of an active minority. A fearless and determined group 
must push forward toward a new status for labor. Only 
by such pressure can labor be lifted out of its present 
status of material and psychological oppression to a status 
of responsibility and influence. It would be a misinter- 
pretation of the facts of the ease to insinuate that labor, 
in reasoning along such lines, is wily, vicious, or insincere. 
Labor is gripped with just as much genuine earnestness and 
spontaneity as any other economic group. The ideology of 
labor on all such matters is the natural and honest psycho- 
logical outcome of the conflict between cold economic facts 
and instinctive human reactions. 

Labor's ideas are, therefore, a great dynamic force in the 
economic situation. The original instincts of human na- 
ture direct the course of labor's mind. Much of the 
mental framework of the labor group appears oftentimes 
to be almost a mass of blind instincts which have not yet 
been carefully thought over. ''That complex of impres- 
sions, thwartings, and desires, warm and human, is wait- 



Labor: Its Part in Production 157 

ing to be sharpened and shaped into orderly thoughts and 
then into a program of action. . . . The great instinctive 
movement of the workers is pushing on. ' ' The unanalyzed de- 
sires are none the less of immeasurable significance. General 
Smuts has remarked that "old ideals of wealth, of prop- 
erty, of class and social relations, of international relations, 
of moral and spiritual values, are rapidly changing. The 
old political formulas sound hollow; the old landmarks by 
which we used to steer are disappearing beneath a great 
flood. "^ In the words of R. F. Hoxie, "The unionists do 
not usually independently understand the theory of their 
own demands, or their constructive program. They feel." 
It is, therefore, a great instinctive mass movement which 
must be seen beneath the ideas of the labor mind. With- 
out a frank conception of this peculiar dynamic condition 
of the labor mind no one is in a position to comprehend at 
all accurately the economic causes of labor's attitude toward 
its part in the whole productive organization. 

Immigration 

The causes and consequences of immigration are of such 
a nature that they have a direct bearing upon economic 
principles. 

The motives to immigration are very largely economic 
motives. The efforts of shipowners, of employers in this 
country, of agents seeking an opportunity for making a 
profit upon immigrants, of landowners looking for immi- 
grant buyers, have probably been responsible for fully one- 
half of the immigration to American shores. At the pres- 
ent time, organized labor is urging that immigration be 
practically prohibited, whereas simultaneously a large 
group of organized employers are anxious that such re- 
strictions as are placed upon immigration shall allow con- 
siderable leeway for the admission of alien labor for their 
plants. 

Distinct types of immigrants have responded to the condi- 
tions. The large majority of immigrants seeking to come 
are from countries of southeastern Europe. Approxi- 
1 Gleaaon, "What the Workers Want," p. 270. 



158 Labor: Its Part in Production 

mately three-fourths of these classes are unskilled laborers. 
"There can be no doubt that the important cause of the 
increase of immigration in the last twenty-five years has 
been the necessity for more crude labor to work in con- 
junction with our labor-saving machinery and expanding 
capital in the development and utilization of our national 
resources, " ^ It is rare to find a native-born American 
employed at unskilled work in a big industrial plant in 
America.^ Aside from their lack of skill, these immigrants 
are, in alarming numbers, incompatible with Americans in 
intellectual equipment, and in standards of life. E. A. 
Ross describes the type by stating: "The plain truth is 
that rarely does an immigrant bring in his intellectual 
baggage anything of use to us,"^ The type, moreover, is 
one which does not acquire a liking for life in America. 
Statistical records indicate that approximately one-half 
of all immigrants return to their native lands. 

The economic effects of this type of immigration are 
manifold. One of its most important effects is seen in the 
state of the labor market and the instability of employ- 
ment. The tendency has been for the supply of labor to be 
so greatly enhanced by immigration that there has usually 
been an excess of laborers above the actual demand in 
American industries. The records indicate that from one 
million to six million workers are idle in the United States 
all the time. A flood of unskilled laborers always coming 
into American industries has severely influenced the re- 
lations of supply and demand in affecting the wage rates. 
Often the fact that a group of alien workers could be 
promptly secured to displace union members or agitators 
or strikers has enabled employers to maintain a firm and 
rigid discipline in their shops. Moreover the tendency of 
immigration to gather momentum during a period of 
American prosperity, and for this momentum to continue 
well into a period of depression, has served to intensify the 
unemployment disorders during periods of industrial 

1 D. D. Lescohier, "The Labor Market," p. 8. 

2W. R. Bassett, "When the Workmen Help You Manage," p. 11. 

3 E. A. Ross, "The Old World in the New," pp. 279, 285. 



Labor: Its Part in Production 159 

crisis. Again, the possibility of falling back upon a reserve 
supply of immigrants has made employers feel frequently 
that the stabilization of employment is unnecessary. ' ' With 
the possibility of falling back upon immigrants, business 
does not plan ahead, spread out, and dovetail its work so as 
to utilize to best advantage the workers already here. ' ' ^ 
The urgency for stabilization of employment is great. At 
present the tendency is for employment bureaus managed 
by aliens to serve as the medium between the man out of 
work and the job looking for a worker. "So far as the im- 
migrant is concerned, the private employment agency of his 
own racial group is still the chief means by which he secures 
work. "2 A system of American employment agencies, 
either public or private, or both, appears to be indispensable 
if the labor market is ever to be organized to the advan- 
tage of both the employer and the immigrant. The inade- 
quate and unscientific distribution of immigrant labor re- 
sults in harmful congestion of immigrants in city districts 
and in certain industries. It also leaves room for much 
exploitation of the immigrants by unscrupulous racial em- 
ployment bureaus and necessitates much distress and dis- 
couragement among the immigrants during the periods of 
unemployment. The situation also has the effect of disap- 
pointing the alien in his anticipations of American life, 
and is an un- Americanizing influence. 

All in all, the American workers have suffered greatly 
from the competition of crude immigrant labor. The 
forms of this suffering are briefly stated by J. W. Jenks 
and J. H. Hammond as follows, ' ' The principal evils which 
have resulted from the great influx into the United States 
from southern and western Europe have been: 

1. To keep down the wages of native Americans and 
of the northern and western European immigrants. 

2. To retard improvement in the general working condi- 
tions of labor, especially in mining and manufactures. 

3. To flood the country with laborers, illiterate in En- 
glish, and, therefore, difficult to develop in efficiency, to 

1 J. R. Commons, "Races and Immigrants in America," p. xxvi. 

2 F. Kellor, "Immigration and the Future," p. 164. 



160 Labor: Its Part in Production 

elevate to the American standard of living, and to assimi- 
late into our social and political system. "^ 

These effects are brought about in part by the excessive 
numbers of immigrants, but more fundamentally by their 
low standards of living and their willingness to work cheap. 
As observed by H. P. Fairchild, "It is not because he has 
had to compete with more laborers, so much as with cheaper 
laborers, that the American workman has failed to secure 
a higher remuneration for his services."^ 

The economic effects of immigration are particularly con- 
spicuous in certain industries which * ' are almost wholly de- 
pendent upon immigrant labor, as it is impossible to secure 
for them a native supply at any price. ' ' ^ Such industries 
for instance are iron and coal, lumbering, track and road 
building, construction, housing, leather manufacturing, 
meat packing, and clothing manufacturing. 

A further consequence of immigration is seen in the un- 
der-development of agriculture and the comparative over- 
development of manufacturing. ' ' The food products of the 
country do not keep up with population, but the manufac- 
tures exceed the growth of population. Recent immigrants 
from South and East Europe go mainly into manufac- 
tures. America is becoming a food importing and a manu- 
facture exporting country. . . . Farmers cannot get labor- 
ers on account of the competition of manufacturers."* 

The immigrant of the pre-war days was criticised for be- 
ing too docile; labor leaders berated him for refusing to join 
unions or to fight for better industrial conditions; econo- 
mists and publicists condemned him for accepting wages too 
low for Americans and for acquiescing in an inferior and 
degrading standard of living. But the post-war immigrant 
is criticised for not being docile enough. If he comes from 
northern or western Europe, he is likely to be impregnated 
with trade union or syndicalist ideas; if he comes from 
southern or eastern Europe, he is likely to be permeated 
"with socialistic or communistic doctrines. The new immi- 

1 "Great American Issues," p. 132. 

2 "Immigration," p. 303. 

3 F. Kellor, "Imjnigration and the Future," p. 157. 

4 Commons, "Races and Immigrants in Anjerica," p. xxvii, 



Labor: Its Part in Production 161 

grant, with his new psychological background, is more 
amenable to unionization, more alert to demand better living 
standards, quicker to resist the industrial status quo. 

Three major types of economic policy toward aliens 
have developed: Americanization, unionization and re- 
striction. During and immediately following the war the 
immigrant, particularly the group from enemy countries, 
was looked upon with suspicion and intolerance. The im- 
migrant was considered a dormant Bolshevist; and raids, 
arrests, deportations, and persecutions were not at all un- 
common. The result was a forceful suppression of the 
more conspicuous trouble makers; but at the same time 
there was aroused considerable resentment and disappoint- 
ment in the minds of a great number of ordinary immi- 
grants. 

The fundamentals of Americanization lie in the basic 
working conditions of the immigrants in America. If wages 
are sound, if the hours of work are right, if the discipline 
by the boss and the foreman is fair and human, if the 
working surroundings are wholesome, — then and then 
only is genuine Americanization a practicability. As J. 
R. Commons has emphasized, — "More than any other class 
in the community, it is the employers who determine the 
progress of the foreigner and his children toward Ameri- 
canization. They control his waking hours, his conditions 
of living, and his chances of advancement." 

With these fundamentals go certain supplementary 
Americanizing policies. Many plants have installed En- 
glish language classes, night schools for study of social and 
historical subjects, Americanization committees, classes for 
vocational training, etc. Many have required workmen to 
have at least their first papers toward naturalization. 
Others, when the post-war period of depression came, 
adopted the policy of ''Fire the alien first." In some 
plants, the reduction of illiteracy was attempted. Work- 
ers who cannot understand English are under a severe 
economic handicap from the employer's standpoint. Their 
efficiency is limited because they confuse instructions and 
muddle orders, Approximately one-fifth of the total for- 



162 Labor: Its Part in Production 

eign-born population in America cannot read or speak En- 
glish. It was reported that approximately one-fourth of 
all men in draft ages were unable in war service to inter- 
pret orders intelligently. Language education obviously 
is reflected in economic efficiency. 

The immigrant is a remarkable saver. He practices 
thrift much more rigidly than the native American. But 
at present, his savings go back to his home country, or are 
deposited with a racial bank which caters to his particular 
needs, or go to the brokers in foreign securities. Ameri- 
can banks are indifferent to these savings because they 
come in too small amounts. It scarcely pays to bother with 
minute deposits. Hence the property stake of the immi- 
grant is in fields which unite his interests with foreign 
financial facilities. ' ' Nothing less than a system for reach- 
ing and safeguarding these savings for investments will 
bring about assimilation through the pocketbook, and 
American banks should be prepared to undertake the 
project."^ Also, the immigrant from time to time needs 
credit to buy a home, to set himself up in business, to tide 
himself over a period of unemployment. At present he 
turns to a local racial leader, an immigrant bank, his con- 
sul, a loan shark or a pawnshop. All such roads lead 
away from a primary property stake in America. Insur- 
ance of immigrants indicates a similar situation. Besides, 
American stores have not found it attractive to cater to 
immigrant buyers, the consequence being apparent in the 
custom of buying at racial stores. The alien can scarcely 
get the spirit of an American standard of living when the 
market in which he buys his food and clothes resembles so 
greatly the shops and stores of the old country. Economic 
Americanization in all these respects is necessary if the 
country is to direct and control the primary interests of the 
immigrant workers. 

Americanization policies are deeply influenced by the re- 
lations of labor unions with immigrants. "Labor unions 
which numbered scarcely 1,000,000 members in 1900, in- 
creased to nearly 5,000,000 in 1920. A large part of the 
1 F. Kellor, "Immigration and the Future," p. 155. 



Labor: Its Part in Production 163 

increase came from recent immigrants. . . . The major- 
ity of unionists are immigrants and children of immigrants 
from countries that know little of unionism. . . . When 
once moved by the spirit of unionism, the immigrants from 
low standard countries are the most dangerous and de- 
termined of unionists. . . . Their resentment toward em- 
ployers who have kept them apart, their devotion to their 
newfound brothers, are terrible and pathetic. With their 
emotional temperament, unionism becomes not merely a 
fight for wages but a religious crusade. It is in the nature 
of retribution that, after bringing to this country all the 
industrial races of Europe and Asia in the effort to break 
down labor organizations, these races should so soon have 
wiped out race antagonism and, joining together in the 
most powerful of labor unions, have wrenched from their 
employers the greatest advances in wages. "^ The immi- 
grant unionists tend more strongly, as a general matter, 
toward radical unionism than native American unionists. 
Thus, the coal miners, the garment workers, the longshore- 
men are the basis of three strong labor unions composed 
preponderantly of immigrants, and their economic demands 
are in a larger measure socialistic than are those of most 
unions where native American membership prevails. 

The union exercises a powerful influence over the immi- 
grant's conception of America. To quote again from Com- 
mons, * ' The effort of organized labor to organize the unskilled 
and the immigrant is the largest and most significant fact 
of the labor movement. . . . For it is not too much to say 
that the only effective Americanizing force for the south- 
eastern European is the labor union." Employee repre- 
sentation with or without the union has, however, in some 
cases accomplished much the same purpose, but only in 
those industries where the employers have an exceptionally 
enlightened conception of the Americanizing influence 
which group self-expression by the immigrants exerts. 
To make this self-expression as safe and sane as possible 
and to provide a wholesome and American form of ex- 

1 J. R. Commons, "Races and Immigrants in America," pp. xx, 
153-154. 



164 Labor: Its Part in Production 

pression of the human impulses behind it is a sound psy- 
chological attitude. The attempt in not a few quarters to 
stamp out the impulses and forbid self-expression is a di- 
rect and virtually irresistible cause of those mental con- 
flicts and psychological upheavals which underlie indus- 
trial disorders. Expression, discipline and sublimation of 
these strong instincts of the immigrants is the sound psy- 
chological and economic procedure; suppression and psy- 
chic revolt are fraught with disorder and disaster. 

Society as a whole accepts the social and economic re- 
sponsibility of protecting itself from excessive invasions by 
undesirable aliens. Laws forbidding the admission of 
anarchists, diseased, insane, etc., have been an established 
part of American policy. The literacy test was adopted 
in 1917, and serves as a roughly approximate quality test. 
In 1921, a quantity test, limiting the annual immigration 
by any one race to three per cent, of those in the United 
States by the census of 1910, became the law of the land. 
The pressure steadily increases to evolve more accurate 
quality tests for immigrants. The development of tests for 
measuring the levels of intelligence in the Army during the 
World War, and the development of similar tests for in- 
dustrial needs, and for schools and colleges, holds out the 
tangible prospect of tests of a like nature for immigrants. 
Such tests would eliminate those of inferior, abnormal, 
delinquent, or neurotic mental equipment, and thereby sup- 
ply the Americanization agencies with a higher grade of 
human material for their efforts. 

Population 

The classic principles of Malthus relative to population 
deserve to be the starting point in considering the popula- 
tion problem. Malthus held that there is a "constant 
tendency in all animated life to increase beyond the nour- 
ishment prepared for it. . . . The ultimate check to popu- 
lation appears then to be a want of food arising necessarily 
from the different ratios according to which population 
and food increase." He claimed that if the standard of 
living were raised, thereupon population would be encour- 



Labor: Its Part in Production 165 

aged to increase so mucli the faster, until the increased 
means of subsistence would be exhausted, and men would 
be back again at the minimum levels of existence. He 
conceived of two great checks upon population, positive 
and negative. Positive checks were in the form of starva- 
tion, pestilence, war, disease ; negative checks in the form of 
wilful limitation of the birth rate. He entertained but 
small hopes of the negative checks ever becoming influen- 
tial enough to pull men up to higher standards of life. 

In spite of the Malthusian pessimism, the standard of liv- 
ing has been raised. While even the poorest laborers are 
better off than the lowest ranks were a century ago, the 
better classes of labor, in comparison with their great 
grandfathers, are immersed in luxury. The theory did not 
give full justice to two factors which have subsequently 
played a large part in the population increase; one, the in- 
creased productivity of the modern economic system; the 
other, the decreased birth rate following upon an improved 
living standard. The industrial revolution, the machine 
method of production, the factory system, the increase of 
capital all served to increase the productive efficiency of 
the population so materially as to more than offset the in- 
crease in human numbers. In regard to the second factor, 
history has found that the higher the standard of living, 
the lower the birth rate and the lower the death rate ; the 
lower the standard of living, the higher the birth and death 
rates. 

The former factor has established what S. N. Patten calls 
"the new basis of civilization." He asserts "the potent 
basic fact of a civilization whose bounds are indefinitely 
widened because the unskilled laborer need no longer be held 
to the plane of sheer animal terror by uncertainty of food 
and employment. Artificial culture and experimental sci- 
ence have already fundamentally altered the elemental rela- 
tions existing two hundred years ago between population 
and environment. . . . Our social inheritances come from 
two radically different forces that have been acting upon 
us from the first. One springs from universal deficit — ^the 
poverty of the early world; the other emerges from the 



166 Labor: Its Part in Production 

later store of goods which build the social surplus. . . . 
Abolish poverty, transform deficit into surplus, fill depletion 
with energy, and the ascribed heredity of the poor will 
vanish with its causes. . . . Disease, oppression, irregular 
work, premature old age, and race hatreds characterized 
the vanishing age of deficit; plenty of food, shelter, capi- 
tal, and mobility of men and goods define the age of sur- 
plus in which we act. Where food and capital are, there is 
work, and where there is steady work, progress comes even 
while wages remain low. The quantities of food and of 
capital will increase more rapidly than they have done, 
while the birth rate touches a lower figure in every 
census. ' ' ^ 

With this material advance has come a psychological 
development especially noticeable in the most favored 
classes of society. The family instincts may be said to be 
the positive forces tending toward an increasing birth rate. 
But as advances in income are made, people see the oppor- 
tunity of satisfying a wide variety of wants, ambitions, 
and desires. The family instincts tend to bring parental 
responsibilities and obligations; the other instincts can bo 
expressed with a minimum of responsibility and obligation, 
— ^they lead to simpler, easier life enjoyments. Moreover, 
the increase in education, social communication, and intel- 
ligence brings about a wider and wider dissemination of the 
means of wilful prevention of birth increase. Also, there 
is an instinctive social revulsion which leads those in pos- 
session of the knowledge of preventive checks to prohibit 
by law and social taboo any formal spreading of the knowl- 
edge among the rank and file. The knowledge of preven- 
tive checks comes, therefore, largely for instinctive reasons, 
to be a kind of monopoly in the hands of the more well- 
to-do classes. As a consequence, among these classes the 
birth rate is controlled without any material repression of 
the sex instincts. Economic advantage and this psycho- 
logical development have gone hand in hand. 

The families of higher education and income are already 
guilty of race suicide. If the replenishment of population 
1 Patten, "The New Basis of Civilization," pp. 25, 34, 43, 186. 



Labor: Its Part in Production 167 

were dependent upon them, it would not be accomplished. 
In the more highly cultured New England districts, the 
size of families is so limited that the population either has 
ceased to increase or is actually on the decline. At the 
other extreme, the inferior native or foreign stock mul- 
tiplies rapidly. Writing of Great Britain, William Mc- 
Dougall states, ''In our own country one-quarter of the 
people of each generation become the parents of about 
one-half of the population of the succeeding generation. 
There can be no doubt that, among this quarter of the 
population the parental, and probably also the reproduc- 
tive, instinct, is on the average stronger than in the re- 
maining three-quarters who produce the other half of the 
next generation. " ^ In other words ' ' the present state of 
the law, of public opinion, and of our economic system is 
tending to degrade the quality of the race by making the 
worst half of the population the parents of more than half 
of the next generation. ' ' ^ 

In analyzing the situation, H. G-c Wells draws a picture 
which is comprehensive: "Travel, leisure, freedom, com- 
fort, property and increased ability for business competi- 
tion are the rewards of abstinence from parentage, and 
even the disapproval of President Roosevelt and the pride 
of offspring are insufficient counterweights to these in- 
ducements. Large families disappear from the States, 
and more and more and more, couples are childless. Those 
who have children restrict their number in order to afford 
those they have some reasonable advantage in life. " ^ In 
order to remedy the faulty inheritance of the population 
from these causes, the science of eugenics has come into 
play. Given its initial impetus by Sir Francis Galton 
about a generation ago, it has come to exercise a deep in- 
fluence upon social and economic thinking. The chief 
objective of the science is to improve the quality of the 
race by discouraging the birth rate among the unfit groups 
and encouraging it among the more developed classes. 

1 "Introduction to Social Psychology." p. 279. 

2Bertrand Russell, "Why Men Fight," p. 213. 

3 "Social Forces in England and America," p. 374. 



168 Labor: Its Part in Production 

The goal of a study of population problems from the 
economic standpoint may be stated in the form of two 
standards, — the quality standard and quantity standard. 
The quantity standard refers to the "best proportion be- 
tween the numbers of inhabitants and the area and resources 
of a land, judged with reference to the abiding welfare of 
the great mass of the people of the nation. " ^ If the quan- 
tity standard be judged from a pecuniary viewpoint it is 
proper to state that, '*It should, therefore, be the aim of 
every nation to keep its population at that number which is 
bound to result in the greatest amount of real income to 
the average citizen."^ It would appear that for the United 
States the quantity limit has been approximately reached 
unless there develops an increase in the per capita produc- 
tivity of economic goods. For fifteen years before the war 
the real income of the wage-earning classes had certainly 
not increased and probably had slightly decreased. The 
increase in real income achieved during the war was made 
possible by an increase in national production of approxi- 
mately 15 per cent. However, the depression following the 
war has seen production suffer a deep slump, throwing up- 
wards of five millions of workers out of jobs and income, 
and tending to put the real incomes of large groups of un- 
skilled labor on approximately the pre-war levels. 

The quality standard looks to the type of character and 
the hereditary vigor of the population which exists, and in- 
sists that a controlling principle of population shall be the 
attainment of a superior racial stock. "The wise ambi- 
tion for a people is to maintain its life at a higher physical 
and psychic level rather than to increase the number of its 
members at the expense of degrading its life below an ac- 
cepted standard. The fact that a people increases but 
slowly in numbers may be an evidence not of degeneracy 
but of enlightenment and prudence."^ John Stuart Mill 
referred to the phrase "the stationary standard" as a possi- 
ble ideal. That is to say, it may be desirable for a nation 

1 F. A. Fetter, American Economic Revieio, Vol. Ill, Sup., p. 6. 

2 W. I. King, "Wealth and Income of the People of the Unitedi 
States," p. 240. 

3 E, C. Haj^es, f'Jntroductiou %o Sociology," p. 44, 



Labor: Its Part in Production 169 

to limit its population so that the numbers neither increase 
nor decrease, because a persistent increase under conditions 
of limited economic support would inevitably lead to a de- 
terioration in the quality of the population. 

The 1920 census for the United States registers a popula- 
tion of approximately one hundred and five million. The in- 
crease during the last decade was at the rate of 14.9 per 
cent., or a rate of increase only two-thirds that of the previ- 
ous decade and less than one-half that of the last decade be- 
fore the Civil War, Part of this lowered rate of increase of 
the last few years is due to the falling off of immigration dur- 
ing the war, and to war mortality. However, looked at 
over a broad space of time, it indicates something of much 
greater significance, namely, a tendency of the rate of in- 
crease steadily to diminish during the last century. If this 
tendency is not checked it will be only a comparatively 
short time before the population will have become station- 
ary or have begun to decline. In other words, America is 
moving toward a position which France has already 
reached and which England has approximated. 

Of the American population, 51.9 per cent, are living 
in cities or towns of more than 2500 inhabitants. The 
American people steadily congest more and more in urban 
communities partly because of the herd instincts which 
bring genuine pleasure from close contact with one's fel- 
lows and partly because of the economic necessities of the 
factory regime. This increasing urban life has well known 
influences in the quality and character of large groups 
of the population. 

Any conception of preventive checks upon the popula- 
tion to keep it within the quality and quantity standards 
must take into account the fundamental relation of the family 
to the birth rate. In France it is a matter of family pru- 
dence to limit the family to a size making possible full edu- 
cational and financial advantages to a few children. In 
England, and to an increasing extent in America, family 
prudence is working in the same direction. To quote H. 
Bosanquet, * ' Finally we come to the most important econo- 
mic function of the family, perhaps the most important 



170 Labor: Its Part in Production 

purely economic function which exists at all, since it con- 
trols directly and finally the prosperity and the ruin of 
nations. In the family, and the family alone, are com- 
bined the forces which determine the quantity of popula- 
tion with the forces which determine its quality; and with- 
out this combination the decay of the people is inevitable. 
. . . Where the quality is right no necessary limit is at 
present within view ; where the quality is wrong, each one is 
too many."^ 

Any factor which tends to undermine the economic 
standards of the family immediately menaces the quality 
of the population. Where an unnecessary accident rate 
throws the burden of earning the family income upon 
the mother or the children, or where unemployment re- 
quires a partial reliance upon the aid of charity, or where 
low wages or excessive hours or any other economic force 
lowers the vitality of any members of the family, the 
quality of the population suffers. In their more extreme 
forms, each of these factors leads to positive degeneracy 
and racial deterioration. The family has in the past been 
left to cope with these problems upon a laissez-faire basis. 
A large number of children have been commonly looked 
upon as a drastic financial hardship for the family, yet the 
community has recognized no responsibility for coming 
to the financial rescue of overburdened families. The 
new tendency, although as yet but mildly developed, is in 
the direction of making the cost of children a partial 
charge upon the community. The payment of maternity 
benefits, the provision of health compensation and other 
forms of insurance under social control, the insistence upon 
rest periods and vacations for women, the allowance of 
income tax exceptions in proportion to the number of 
children, the segregation of hereditary defectives at state 
expense, are a few of the manifestations of this tendency. 

Moreover the economic status of families and children is 

affected by religious convictions. Catholic families are 

inclined to be larger than non-Catholic because of the 

religious tenets against restricting the birth rate. McDou- 

i"The Family," p. 232. 



Labor: Its Part in Production 171 

gall concludes, "That where religious and other sanctions 
give adequate support to the family instincts, no serious 
diminution of fertility occurs." Roosevelt made urgent 
appeals against race suicide by insisting that it must come 
to be a proud family duty among the well-to-do classes 
to possess a generous number of children. What Roose- 
velt tried to make a matter of civic pride, Galton declared 
could be given the force of a religious idea. Then a 
family would suffer a loss of prestige in the community 
unless it was doing its share of the replenishment of the 
race. It would meet with social condemnation to be respon- 
sible as a family for any tendency towards race suicide. 
Obviously, therefore, the per capita income of the country 
and the quality and quantity of the population all head 
up in the family ideals which are generally accepted. 

Economic Significance of the National Character 

All of the previous considerations in regard to alien stock 
on American soil and the quality and quantity of the national 
population have the profoundest bearing upon the econo- 
mic and social progress, or decline, of the national life. If 
the preponderance of the population increase comes from 
the classes with the weakest biological inheritance and with 
the least favorable family and social environment, the 
national character is menaced at its vital centers. In the 
competitive race between nations for social and economic 
survival, and in the incessant rivalry of nations for posi- 
tions of influence and prestige, no one can doubt that the 
ultimate superiority is held only by nations whose blood is 
the most virile. AVhere classes of population which rise 
to positions of economic success shrink from the obliga- 
tions of parenthood, the inheritance of a nation is jeopar- 
dized, and America is in the initial stages of that pre- 
carious position at the present day. Certainly the situation 
is one which offers a challenge to Americans to make 
new adaptations between their family and social standards 
and their economic circumstances ; and to reconstruct their 
ideals and traditions for the avowed purpose of preserving 
the highest quality of the national character. 



172 Labor: Its Part in Producticm 



REFERENCES 

Leverhulme: The Six-Hour Day 

Penty, a. J.: Old Worlds for New 

Beyer and Others: Workingmen's Standard of Living in Phila- 
delphia 

More: Wage Earners' Budgets 

Mitchell, John: Organized Labor 

Groat: Organized Labor in America 

Hollander and Barnett : Studies in American Trade Unionism 

Interchurch Report on the Steel Strike of 1919 

Withers, H.: Poverty and Waste 

Tryon: Household Manufacture in the United States 

Redfield: The New Industrial Day 

Frank, G.: Politics of Industry 

Gantt, H. L.: Organizing for Work 

Gilbreth: The Psychology of Management 

Wera: Human Engineering 

RUBINOW, I. M.: Recent Trend of Real Wages, American Eco- 
nomic Review, Vol. IV, pp. 793-817 

Fairchild, H. p.: Standard of Living, American Economic Re- 
view, Vol. VI, p. 9 

Jones, F. W. : Real Wages in Recent Years, American Eco- 
nomic Review, Vol. 7, p. 319 

Taussig, F. W.: Minimum Wages for Women, Quarterly Jour- 
nal of Economics, Vol. 30, p. 411 

Adams and Sumner: Labor Problems 

Devine, E. T.: Misery and Its Causes 

Hunter, R.: Poverty 

Streightoff, F. H. : The Standard of Living 

HoxiE, R. F. : Trade Unionism in the United States, Scientific 
Management and Labor 

Bassett, W. R.: When the Workmen Help You Manage 

Ross, E. A.: The Old World and the New 

Commons, J. R.: Races and Immigrants in America 

Kellor, F.: Immigration and the Future 

Jenks and Hammond: Great American Issues 

Wells, H, G.: Social Forces in England and America 

Carver, T. N.: Essays in Social Justice 

Ward, H. F. : The New Social Order 

Fairchild, F. P.: Immigration 

Bogardus : Americanization 

Drachsler: Democracy and Assimilation 

Davis: Immigration and Americanization 

Jenks and Lauck: The Immigration Problem 

Ely, R. T.: The Evolution of Industrial Society 

Ryan, J. A,: Distributive Justice 



Labor: Its Part in Production 173 

BliOOMFlELD, D.: Modern Industrial Movements; Employment 
Management; Modern Labor Problems 

Bloomfield, M.: Management and Men 

Toynbee: The Industrial Revolution 

Wright: The Industrial Evolution of the United States 

Commons, J. R.: Labor and Administration 

Baker, R. S.: The New Industrial Unrest 

Cohen: Law and Order in Industry 

Cole, G. D. H.: Labor in the Commonwealth; The World of 
Labor 

GoMPERS, S.: Labor and the Common Welfare; Labor and the 
Employer 

Taylor, F. W.: Scientific Management; Shop Management 

Slighter, S. H.: The Turnover of Factory Labor, pp. 185-195 

Brissenden and Frankel: Labor Turnover; Political Science 
Quarterly, Dec, 1920, p. 579 

Lescohier: The Labor Market 

Report of Ex-President Wilson's Second Industrial Conference, 
1920 

Muscio, B.: Lectures on Industrial Psychology 

Link: Applications of Psychology to Industry 

Goldmark: Fatigue .and Industry 

Report of British Ministry of Munitions, Health of Munition 
Workers' Committee, 1918 

Commons and Andrews: Principles of Labor Legislation 

Ogburn: a Living Wage, Annals of the American Academy of 
Political Science, Vols. 78-81, pp. 114-116 

Bulletin 265, United States Bureau of Labor Survey of Selected 
Industries, 1919 

Monthly Labor Review, Vol. 9, pp. 1-13 

Parmelee: Poverty and Social Progress 

Hollander: The Abolition of Poverty 

Hayes: Introduction to the Study of Sociology 

Friday, David: Profits, Wages and Prices 

Monthly Labor Review, Vol. 11, p. 101 flF. 

King, W. I.: Wealth and Income of the People of the United 
States 

KiTSON, H. D.: Journal of Political Economy, pp. 330-338 

Kelley, R. W.: Hiring the Worker 

Tead and Metcalf: Personnel Administration 

Williams, Whiting: What's on the Worker's Mind? 

Gleason, Arthur: What the Workers Want 

Tawney, R. a.: The Acquisitive Society 

Carlton, F. T.: Organized Labor in American History; His- 
tory and Problems of Organized Labor 

Problems of Population and Parenthood: Second Report Na- 
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174 Labor: Its Part in Production 

Marshall, L, C: Readings in Industrial Society, Chapter 9 

Hobson: Work and Wealth 

Clay, Henry: Economics for the General Reader, Chapters 16- 

17 
Commons, J. R.: Industrial Government; Trade Unionism and 

Labor Problems; History of Labor in the United States 
Ryan: A Living Wage 
Beveridge, W. H.: Unemployment 



CHAPTER VII 

CAPITAL: THE RIGHTS AND DUTIES OF OWNERSHIP 

The distinguishing features of economic wealth are own- 
ership and utility. Goods or services become economic 
wealth when they are of use to someone and when some- 
one claims the rights of ownership over them. The user 
or the owner may be an individual, a social group, or a 
political body. The title of ownership consists of the power 
and right of any agent, private or public, to withhold 
goods or services from use by others. It is the power to 
withhold land from the person who wants to build a house 
or factory. It is the power to withhold food or clothing 
from the prospective consumer. It is the power to with- 
hold water from the city dweller or to withhold the means 
of transportation from the man who wants to travel. Such 
goods or services are withheld upon a condition, — that con- 
dition being the ability and the willingness of the person 
who desires the goods or services to give a certain payment. 
Air, sunlight, dirt, the ocean, or rainfall do not reckon 
in the category of economic wealth because no one has the 
power to withhold such objects from the use of anybody 
else. 

They do not come into the classification of wealth be- 
cause, no matter how useful they may be, nobody can 
hold ownership over them. Nobody can keep them from 
common use on condition that the would-be user offers cer- 
tain terms of payment. Only goods which are limited in 
quantity, are capable of being owned. An element of 
scarcity in any good makes that good of the type which 
can be owned advantageously. Economic wealth arises 

175 



176 Capital 

whenever any one acquires the power to withhold goods 
or services from the use of those who need or want them. ^ 

The distribution of this power to withhold is the distri- 
bution of ownership. A large part of economics is con- 
cerned with problems centering around the means by which 
this power to withhold is acquired, the reasons why some 
have much of it and others have little, the methods by 
which the power to withhold is exercised, and the possi- 
bility of its control by social agencies. These problems 
are fundamental in economic studies, and a discussion of 
their various phases is of the utmost importance. 

What are the forms of the goods and services of the 
economic community? The question makes necessary some 
classification of goods and services. There is, for example, 
land, the income from land being known as rent. There 
are also, material goods, such as machinery and buildings 
used for production, the income from them being known 
as interest or profits. There are, thirdly, material goods 
such as bread and butter or shoes and stockings to be used 
for consumption, the income from them giving rise to profits. 
There are finally labor, services, work, the income from 
them being known as wages, salaries or fees. 

In their entirety, these goods and services constitute a 
stock on hand, a collection and accumulation, and the term 
wealth is often used by economists as covering this total 
stock in existence at any one time. There is, however, a 
second use of the term, in which reference is had to the 
income accruing to men over a stated period of time. "What 
is an individual's wealth? From the former point of 
view, it is all the goods and services which remain in his 
possession as a result of his total accumulations to date. 
From the latter point of view it is his income, from what- 
ever source, for a day, a month, or a year. 

Under the modern economic regime, wealth, in which- 
ever light it may be viewed, is measured by a price. "Which 

1 See Alfred Marshall, "Principles of Economics," pp. 54-62 ; E. 
Cannan, "Wealth," pp. 1-39; W. I. King, "Wealth and Income of 
People of United States," pp. 5-15; Carver, "Distribution of Wealth," 
Chapter III. 



Capital 177 

is the greater object of wealth, a suit of clothes or an auto- 
mobile? The price attached to each one is a sign of its 
relative wealth. So all goods and services come to be 
spoken of in terms of money. Land, labor, machinery, 
food, all are tagged with a price. The price system is all 
inclusive in the economic system, and nothing that counts 
as wealth escapes the tag of price. A good or service with- 
out a price sign is unintelligible to the economic system. 
The total possessions of an individual, or his income, or 
his services are translated into a price and are qualified 
to figure in the economic regime only when they have re- 
ceived that brand.^ "What is a man worth? One hundred 
thousand dollars, perhaps. That is, the goods and services 
which he has title to are rated in the price regime at that 
figure. The extent and degree of a man's power to with- 
hold anything from the use of others is indicated by the 
amount of the price attached to that power. 

As a basis for understanding the significance of some 
general principles, certain facts of ownership and wealth 
are necessary at the outset. These facts fall roughly into 
the following main classes : 

1. The total stock of wealth of the nation. 

2. The annual income of the nation. 

3. The proportion of the annual income consumed to 
that saved to be used for further production. 

4. The proportions of the income of all classes for ser- 
vices rendered and for possession of property. 

5. The relative fractions of the national income going 
to wages, rent, interest and profit. 

6. The inequalities of property ownership between in- 
dividual persons. 

7. The inequalities of income between individual per- 
sons. 

After these facts are in mind, it will be possible to ex- 
plain some of the forces and influences which make them 
what they are. 

1. The total stock of wealth of the nation in 1904 was 
approximately $107,000,000,000. Subsequent capital ac- 

iH. J. Davenport, "Economics of Enterprise," Chapters II-III, 



178 Capital 

cumulation through the excess of production above con- 
sumption had brought the total up to about $187,000,- 
000,000 in 1912. When measurement is made by the 
changed price levels, following the war, the national wealth 
would have been in June, 1920, about $400,000,000,000. 
The decline of price levels since that date would again alter 
the price index of the national wealth. Obviously, the 
fluctuations in price levels do not mean that the national 
wealth is fluctuating in like manner. The money stand- 
ard of measurement changes, but the wealth does not un- 
dergo corresponding ups and downs. The wealth itself, 
in terms of coal and iron, food and cotton and wool, gold 
and silver, automobiles and land, factories and machinery, 
carries a fluctuating money price, but the actual goods do 
not fluctuate in like proportions. This unstable relation- 
ship between prices and the goods themselves makes the 
method of measuring wealth in money units somewhat un- 
satisfactory, and yet money is the only common unit of 
measurement of all forms of economic wealth. Moreover, 
when the money measure of wealth is understood for the 
thing it is, — a fluctuating measure, — it allows a fairly ac- 
curate impression of the volume of the nation's wealth. 
The figures which have been given here should be taken as 
rough approximations. No official estimate of the nation's 
wealth has been made since 1912 and consequently these 
figures represent non-official calculations. The purpose is 
simply to give a mass impression of the nation's total 
economic wealth. 

2. The annual income of the nation. The income of 
the nation in any single year is a matter different from 
the total accumulation of wealth at the time. The nation's 
annual income in 1913 is estimated at about $34,400,000,- 
000. By 1918 the income was estimated at approximately 
$61,000,000,000. After the proper discount is made for 
differences in price levels for the two years, the 1918 income 
represents an increase of physical output, an increase in 

I'See "Wealth, Debt and Taxation," 1913, United States Census; 
Sir Edgar Crammond, Bankers Institute, London, 1920; Sir Josiali 
Stamp, Journal of the Royal Statistical Society, July, 1919. 



Capital 179 

volume of production, of from 10 to 15 per cent, over the 
1913 level. Moreover, the annual income of the nation 
prior to 1913 had been steadily mounting. The average 
income per capita in 1913 was practically double the 
figure for 1880. The gain in actual volume of production 
during the war period has not been maintained during the 
post-war period, due in part to labor inefficiency, to aban- 
donment of war emergency motives and organization, and 
to business depression. The annual income for 1920 has 
been estimated, in the price levels of that year, at ap- 
proximately $65,000,000,000.1 

When a view is taken of annual income over a period of 
several decades, it is found that since 1850 the income in 
terms of actual purchasing power has more than trebled. 
This enormous increase in annual income is attributable 
primarily to the advent of the revolutionary improvements 
in machinery and scientific production. With the utiliza- 
tion of natural power, the application of electrical energy, 
the countless inventions of mechanical devices, the erection 
of factory equipment, the development of natural resources 
and the advances made in a million ways in all the in- 
dustrial arts and sciences, the productive capacity of the 
individual worker has grown steadily. No one familiar 
with the state of the industrial arts and sciences would 
intimate that this development has reached its limit. On 
the contrary the future appears to be filled with possibili- 
ties of discovery and invention of incalculable importance. 

Of course the mere increase in the total volume of an- 
nual income is no guaranty that the new total will be 
well distributed. Unless the greater volume is wisely 
divided among all groups, so as to make constantly for a 
higher degree of common welfare, the new volume could 
scarcely justify itself. But assuming a wise distribution, 

1 For income data, see National Bureau of Economic Research, 
'income of the United States," pp. 64-66, 79, Chapters II, IV; King, 
"Wealth and Income of the United States," p. 129, Chapter VI; 
Kemmerer, "High Prices and Deflation," Chapter I; W. W. Stewart, 
Economic Review, Vol. XI, pp. 57-82; E. E. Day, Review of Economic 
Statistics, September-December, 1920; D. Fridav, Journal of Political 
Economy, Vol. 26, pp. 952-969; Vol. 27, pp. 117-126. 



180 Capital 

the foundation for a rising standard of living for every- 
body and a general human and material advance rests 
in the increased producing capacity of the country due 
to the development of the mechanical and scientific basis 
of modern industry. 

3. The proportions of the national income saved and 
consumed. The national income may roughly be divided 
into a portion calculated for immediate consumption and 
a portion set aside, and saved as a means to further 
production. In the one class would belong the food 
of the family table, the overalls and the evening gowns 
of the various classes, the shoes and hats, the houses and 
automobiles, — anything and everything that is used up at 
the time by the consumers of the country. In the latter 
class would belong the factory buildings, the research lab- 
oratories, the machines and work benches, the trucks and 
railroad equipment, — the entire outfit of productive capi- 
tal which is utilized to maintain the production of the 
country from year to year. In the year 1910, from 6.5 
to 10 per cent, of the income was saved, the balance con- 
sumed. In the year 1913, about 20 per cent, of the income 
was saved, and about 80 per cent, consumed. In the ab- 
normal war year, 1918, about 30 per cent, was saved and 
about 70 per cent, consumed. The normal peace time sa- 
vings range within the percentages for 1910 and 1913. J. 
A. Hobson has estimated that in England the average an- 
nual savings amount to about three-twentieths of the total 
annual income. Obviously, the great bulk of the nation's 
income goes into consumption. But it is out of the saved 
fraction of the income that the productive equipment of 
the country is built up and expanded. If the propor- 
tion saved becomes too smaU, the future productive equip- 
ment of the country is dwarfed, and the basis for the 
annual income of the next generation is undermined. Sa- 
ving is an imperative economic virtue under the present 
economic regime, A nation which launches into an orgy 
of expenditure for goods to satisfy the needs of the mo- 
ment, and forgets thrift and saving, may enjoy itself for 
the time being, but foresight and precaution call for a high 



Capital 181 

ratio of saving out of the nation's income. An abundant 
amount of productive capital in the country is the only 
means by which the high national income can be main- 
tained year in and year out.^ 

4. The proportions of national income for service and 
for ownership. From another important standpoint, the 
national income divides itself into two classes : one, that 
going as a reward for work performed and services ren- 
dered by human activity ; the other, that going to the hold- 
ers of property by virtue of their claim of ownership. 
"Work and property are the two great categories upon 
which, in approaching the problem of distribution, we 
should concentrate our attention."^ The former category 
covers wages, salaries, fees, etc., reward for effort expended, 
mental or manual or both. The latter covers interest, 
dividends, or rent, — that is, reward because the owner of 
property has loaned or invested his savings. Generally, 
the two classes are fairly distinct. The owner of bonds 
to the amount of $1,000,000 draws an interest of perhaps 
5 per cent., the interest being a reward for ownership. 
The wage worker in the factory where the million dollars 
is invested draws a wage of perhaps $1200, the wage being 
a reward for effort of hand and brain. The president of 
the company draws a salary of perhaps $50,000 as a reward 
for his services as an executive. He may at the same time 
own bonds or stock in the company upon which he receives 
property income in interest or dividends. The president 
of the concern in that case receives both an effort income 
and a property income. However the two sources of in- 
come distribution remain distinct. They are separate 
shares of the income of the individual, and in the aggre- 
gate stand out as separate shares of the total national in- 
come. 

The statistics of the case are too incomplete to allow a 
precise estimate of the ratio between the two shares, but 
approximations are possible and for all general purposes 

1 See D. Friday, "Profits, Wages and Prices," Chapter V ; also in 
The New RepuUic, Vol. XXIX, pp. 64-67; King, op. cit., 132-137. 

2 H. G. Dalton, "The Inequality of Incomes," p. 175. 



182' Capital 

these approximations are higlily useful, Hugh Dalton has 
estimated the relative shares received for property and 
for effort in the following amounts : ^ 

Share of Property Share of Effort 
per cent per cent 

United Kingdom 32 68 

United States 29 71 

France 39 61 

Italy 26 74 

The share of property ranges therefore in the vicinity of 
30 per cent, of the total income fund.^ This ratio however 
fluctuates a great deal with different years. During the 
years 1916 and 1917 the share of the annual income which 
went in the form of wages and salaries was comparatively 
low. It amounted probably to less than % of the total. 
But in the following two years, the share of wages and 
salaries mounted high, rising to approximately % of the 
total income. The variations arise from fluctuations in 
price levels, in the system of taxation, in labor efficiency, 
and in wage rates.^ The essential concept is the fairly 
stable ratio between incomes for doing and incomes for own- 
ing. The incomes for doing amount to more than double 
the incomes for owning. 

The justification for this ratio, the good or harm com- 
ing from it, and the causes perpetuating it, give rise to 
intricate and difficult questions. They are best approached 
by viewing ownership as an institution. An analysis of 
the institution of ownership and private property will 
therefore be made in the latter portion of this section.* 

5. The proportions of income going to wages, interest, 
rent, profits, etc. The fractions of the total income as- 
signable to each of these factors are of necessity approxi- 
mations. They can lay no claim to close accuracy, and yet 
they have a very real value in that they give a rough pic- 
ture of the stream of income. This picture is essential for 

lOp. cit., p. 209. 

2 National Bureau of Economic Research, Income of the United 
States, pp. 97-108, 145. 

3 David Friday, 'Trofits, Wages and Prices," pp. 124-125, 130. 

4 See below, pp. 193-215. 



Capital 1^ 

a genuine conception of the working of the economic sys- 
tem. Rent claims approximately 8 per cent, of the total 
income. The share of rent has remained fairly constant 
since 1850. This 8 per cent, represents the income for 
ownership, which flows to those who have the title of 
possession to the land of the country. It is primarily an 
income for owning rather than for doing. 

Profits claimed in 1910 about 27.5 per cent, of the total 
income. Profits in this sense of the term refers partly 
to income for effort, skill of management, service rendered, 
etc., but chiefly to income for ownership. Although the 
major part of profits represents income for ownership, 
nevertheless the ratio between the two is not a matter of 
exact statistical record up to the present time. Profits is 
therefore loosely used in this estimate. In 1918, the in- 
dividuals and corporations reporting to the Bureau of In- 
ternal Revenue indicated that the total of business profits 
for the year was $14,500,000,000, or about 21 per cent, of 
the total income for the year. ^ 

Interest claims from 5 to 9 per cent, of the product, 
varying with the year in question. Interest as here used 
covers the return on bonds and notes, but not the dividends 
on stocks. Interest, like rent and a part of profits, is a 
reward for ownership. It is paid to the owner of property 
or the holder of credit as a property income rather than 
as an income for effort and workmanship.^ 

There is nothing invidious in pointing out the relation 
between these factors of income for owning rather than 
for doing. The function of ownership is indispensable in 
the economic process under a private property regime, 
and there is nothing derogatory in income based upon that 
function. Owning is however a distinctly different function 
from doing, and the clear separation of the two bases of 
income is of real importance. 

6. Personal inequalities of property ownership. In the 
United States, 1 per cent, of the population owns approx- 

1 David Friday, American Economic Review, Sup., March, 1920, 
p. 22. 

2 On above data, see Kin^, op. cit., pp. 158-160; Bowley, "Division 
of the Product of Industry," pp. 42-451 



184} Capital 

imately one-half of the total wealth of the country. Own- 
ership is largely concentrated in the hands of a few. ^ In 
the more advanced industrial countries, a large majority 
of the population is virtually propertyless. Three-fifths 
of the population in such countries as the United States, 
the United Kingdom, France and Prussia are without own- 
ership of any considerable property. It has been estimated 
that in New York City, as much as two-thirds of the popu- 
lation are without any registered property.^ In these 
modern industrial communities, the richest 2 per cent, 
of the people own considerably more than all the rest 
of the people taken together. This extreme inequality of 
ownership indicates in a modern democracy two classes, 
side by side, the one loaded with enormous possessions, the 
other destitute of any property save the more immediate 
necessities of life. ^ In the large industrial centers, prob- 
ably 90 per cent, of the wage workers are propertyless. 
Only a negligible few wage earners in New York City 
Qwn their own homes. * 

The middle classes, comprising about one-third of the 
population, own about one-third of the property of the 
country. Clearly, the extremes of concentration take place 
in those limited circles occupied by the very well to do. 
Their stack of property mounts to the sky while the pile 
of the great mass of wage workers is of pigmy propor- 
tions. 

It follows, therefore, that the great bulk of the income 
for owning rather than doing goes to a very small frac- 
tion of the population. The giant's share of property in- 
come goes to the richest 1 or 2 per cent, of the population. 
The income of the lower two-thirds of the population is 
almost exclusively an income for physical and mental ef- 
fort. They receive virtually no income for owning, for 
they own virtually nothing. Property income centers in 

1 R. T. Ely, "Property and Contract in their Relations to Wealth," 
p. 319. 

2 Ibid., pp. 318-319. 

3 W. I. King, "Wealth and Income of People of United States," 
p. 96. 

4R. Hunter, "Poverty," pp. 42-43. 



Capital 185 

the property owners. This contrast is most violently 
marked when the largest single fortune in the United 
States is compared with the propertyless condition of the 
mass of the population. This fortune was estimated in 
1915 at about $1,000,000,000, and is equivalent to the wealth 
of 2,500,000 of those classed as in the lower levels of 
society.^ 

The causes of these inequalities and their effects upon 
society require an analysis of private property as an institu- 
tion. The institution provides an organization of econ- 
omic forces of which this gross inequality is the natural out- 
come. Any other outcome would involve an alteration of 
some characteristics of the institution. This institutional 
analysis will be undertaken later in this chapter. 

7. Personal inequalities of income. In the United 
Kingdom, pre-war estimates put one-half of the total in- 
come of the nation in the hands of about 12 per cent. 
of the people, and, what is more striking, one-third of the 
total income in the hands of about 3 per cent, of the popu- 
lation. ^ In the United States, that richest 1 per cent, 
of the population which owns about one-half the wealth 
receives approximately 15 per cent, of the income. This 
brings the facts to the point where it is apparent that the 
inequalities of income are not so great as the inequalities 
of ownership. The total income of the masses of workers 
is not reckoned upon any property basis, but upon a wage 
or salary basis. ''The working man, commonly, receives 
more income in a year than the total value of his pos- 
session while the rich man 's income, being composed largely 
of rent, interest, and dividends, will, ordinarily, constitute 
but three to ten per cent, of his wealth. ' '^ But this is not to 
imply that the inequalities of income are not carried to 
startling extremes. Indeed, if the greater inequalities of 
ownership were not already in mind, these inequalities 
of income would seem staggering enough in themselves. The 
richest fifth of the families in the United States claims 

1 Federal Commission on Industrial Relations, Vol. T, pp. 32-34. 

2 Sir L. C. Money, "Riches and Poverty," Chapter III. 

3 W. I. King, op. cit., p. 231. 



186 Capital 

about half the income.^ To put the facts of income and 
ownership side by side, it may be stated that one-half of 
the income goes to the richest fifth of the people whereas 
one-half of the wealth is owned by one one-hundredth of 
the people.^ 

The full effect of the war period upon inequalities of in- 
come has not yet been measured. One impressive fact 
is the number of incomes of $50,000 or over. They were 
estimated at about 27,000 in 1917 and 21,000 in 1918. In 
1917 there were 141 individuals whose annual income was 
one million dollars or over. In 1918, there were 67 people 
listed in the same class. At the other end of the scale there 
were over 85 per cent, of the population gainfully em- 
ployed whose incomes did not mount high enough to list 
them in the $2,000 per annum class. The incomes of the 
largest property owners make up a huge share of the total 
income of the nation, and the inequalities between these 
two great groups of the population are enormous.^ 

Any attempt to understand the problem of ownership, 
wealth and income must begin with a vivid conception of 
these inequalities. The extremes of income, the violent con- 
trasts between the most well-to-do and the least well-to-do 
are the center of the picture of income distribution. 

In the higher income classes, the ratio between income 
for owning and income for doing is also significant. Ap- 
proximately one-half of the incomes between $3000 and 
$4000 arises from personal services, the other half from 
ownership. When incomes reach the $10,000 figure, the 
share due to personal service is reduced to one-fourth, 
whereas the share due to owning rises to about three- 
fourths. "When incomes reach the figure which rank the 
individuals as millionaires, the share due to personal ser- 
vices falls to about 14 per cent. When incomes pass 
the $1,000,000 mark annually, the share for personal ser- 
vices declines to a trifle over 4 per cent. Obviously, the 

1 King, op. cit., p. 235. 

2 On above data, see National Bureau of Economic Research, op. 
oit., pp. 108-143, 147. 

3 See Statistics of Income, 1918, United States Bureau of Internal 
Revenue. 



Cajntal 187 

higher the income, the lower the proportion due to per- 
sonal services, and the greater the proportion due to owner- 
ship.^ 

The statistics of wealth, income and ownership are of 
importance because they give a quantitative conception of 
the actual facts. By setting the various phases of the in- 
stitution of wealth and ownership in their right proportions, 
the statistics supply the economic observer with fairly ac- 
curate mental pictures of the relative size and strength of 
the several factors entering into thought on the broad 
problems of wealth. 

Interpretation of the Facts 

An interpretation of these facts may well begin with 
the first two groups in the classification, namely, the total 
stock of wealth and the total income of the nation. The 
significance of wealth and income for a nation is con- 
ditioned by a number of fundamental factors. Wealth and 
income are greatest for a nation which is abundantly en- 
dowed with natural resources. A nation which is defi- 
cient in such basic natural resources as coal and iron is 
severely restricted in its volume of wealth. Wealth and 
income tend to be greatest where the agricultural soil is 
fertile and large in area ; where mineral supplies are of high 
quality, easy of access, and vast in quantity ; where rivers, 
lakes and sea coast are favorable for commerce, and where 
the topography of the country is favorable to elaborate 
transportation systems. These qualifications do not insure 
a high national income ; they merely offer a possible founda- 
tion for national prosperity. The qualities of the national 
population determine the extent to which material resources 
will be converted into national prosperity. That people 
which contains men of strong initiative, leaders who are 
willing to take great risks in the development of the coun- 
try's supplies of materials, organizers who have an instinc- 
tive drive toward organizing all of the factors of production 
and distribution, and individuals who have the ability and 
genius to become great captains of industry — ^will con- 
iD. Friday, Journal of Political Economy, Vol. 26, p. 962. 



188 Capital 

vert most completely the raw resources of a country into 
national prosperity. Moreover the character of the labor- 
ing population will condition the use made of a founda- 
tion of rich resources. A labor population which is of 
relatively high intelligence, which has physical stamina 
and vigorous instincts, which has aptitudes for craftsman- 
ship or adaptability to the discipline of mechanical indus- 
trial processes, — is favorable to a successful utilization of 
the raw resources of the country. In a broader way, the 
whole social system of a country conditions the relations 
between national resources and national prosperity. The 
extent to which class lines are drawn in the social structure, 
the moral and social standards of the upper and lower 
levels of population, the effect of customs of consumption 
upon the character and ideals of a people, the personality of 
the average citizen in his social surroundings, — all these in- 
fluence the volume of income and of wealth, and determine 
what their component elements shall be. The broad truth 
of the matter is that the entire economic structure of each 
generation, its technological development, its manner of in- 
dustrial organization, and its social institutions generally, 
shape the economic energies of the nation, and determine 
what kind of product shall be prized in the nation, how 
much of it shall be desired, and how much oi it can be 
actually produced. 

The wealth of the country has been spoken of thus far 
mainly as an accumulation of goods and commodities. 
This conception of wealth is true to the facts of the case, 
but it needs a further interpretation in order to make clear 
its primary meaning from the human standpoint. The 
goods in and of themselves would be worthless unless they 
contributed to the satisfaction of the needs and wants 
of men. Hence, the stream of commodities belonging to a 
people constitutes also a stream of satisfactions of human 
wants. This latter stream is properly conceived as a stream 
of welfare. When wealth is viewed as a stream of wel- 
fare, it should be viewed from the standpoint of producers 
as well as consumers. For instance, clothing of excellent 
quality may bring real welfare to the consumer who wears 



Capital 189 

it; but if the producer of the clothing worked in a sweat- 
shop at inadequate wages and under conditions which 
harmed him, body and soul, then the clothing is a form 
of wealth which represents welfare to consumers only, 
and not to producers. Therefore a huge national income 
which entailed human damage to those engaged in produc- 
ing it would represent a very low stream of producer 's wel- 
fare. It would not merely bring producer's degradation 
instead of producer's welfare, but it would so affect the 
producer that when he assumed his role as a consumer, 
he would be disqualified mentally and physically from that 
standard of enjoyment and satisfaction which brings con- 
sumer's welfare. Hence wealth may be viewed as welfare 
to the extent that it constitutes a stream of welfare to men 
in their dual role of producers and consumers. Wealth 
which represents welfare to those who make it and welfare 
to those who consume it, is the only form of wealth which 
nations can afford to be proud of.^ A view of wealth as 
both producer's and consumer's welfare is therefore neces- 
sary. 

In interpreting the third classification, the proportions 
of income consumed and saved, the virtue of thrift comes 
into prominence. The material progress of a nation is ac- 
complished because there is an excess of production above 
consumption, and the excess takes the form of new mechan- 
ical equipment, improved transportation facilities, and 
economic capital of all sorts suited for carrying on future 
productive activity. A nation which consumes imme- 
diately all or nearly all that it produces, is rushing to- 
ward the day when its machinery will be worn out, its 
railroads depreciated, its buildings crumbling, with little 
or no new equipment to replace the old. The technical 
equipment of a modern economic society increases in pro- 
portion to the extent to which people save part of their 
income and invest it in some form of capital that will aid 
in carrying on production. National power and prestige 

1 For an excellent and elaborate discussion of consumer's welfare, 
see A. C. Pigou, "Wealth and Welfare," and of producer's welfare, 
Bee J. A. Hobaon, "Work and Wealth, A Human Valuation." 



lOa Capital 

in the present world situation depends in fundamental re- 
spects upon the willingness of the nation to set aside part 
of its earnings for the uses of the future. The nations 
which can, by wise saving, increase the amount of efficient 
machinery per capita, and the amount of horsepower, de- 
rived from steam, electric, water or other power sources, 
that is at the aid of each worker, and the supply of other 
necessary capital, has laid the foundations for an increase 
of production for the nation and an increase of income for 
the average individual. Increase of capital equipment mul- 
tiplies the productive efficiency of the individual worker 
and of the nation, and the rate of increase is measured by 
the rate of national saving, i.e., the annual excess of produc- 
tion over consumption. 

Two sources of savings command prior attention: the 
incomes of individuals, and the incomes of corporations. 
Individual thrift is a virture for rich and poor alike. Of 
course, it is a virtue which is the easier practiced the 
greater the individual's income.. A person with large in- 
come may make large savings with comparative ease, while 
a person with a living wage senses a real sacrifice for each 
dollar saved. For the latter person as for the former, 
the savings represent a source of personal gain and perr 
sonal security. The savings of the wage earner may draw 
interest in a savings bank or elsewhere, and are available 
for some possible future emergency when the worker has 
lost his job, or has to meet a doctor's bill, or has to cope 
with some other urgent need. The savings of the person of 
large income contribute to the accumulation of a personal 
fortune, with all that a fortune means in the form of 
power, prestige and economic freedom and security. At 
the same time that saving results in personal gain, it also 
results in national gain, for it swells the amount of the 
total fund of savings and thereby increases the productive 
equipment and economic efficiency of the country as a 
whole. Thrift, therefore, benefits both the individual and 
the nation. 

Although thrift is, by every rule of logic, a real public 
and private virtue, nevertheless it is a virtue which the 



Capital 191 

individual finds it exceedingly difficult to practice. The 
difficulty arises from the psychology of the situation. In- 
come spent immediately buys immediate welfare, im- 
mediate enjoyment, immediate satisfaction, whereas income 
saved represents postponed welfare, and postponed en- 
joyment. The temptations to satisfy the individual's 
immediate cravings are so universal, and so allur- 
ing that it is vastly easier to spend income and satisfy 
the cravings than to deny the immediate temptations to 
enjoyment and comfort and to dwell with sweet satisfac- 
tion upon the logical virtues of frugality. Frugality it- 
self must be made to satisfy such primary instincts as 
the motive to care for one's family in the future, or the 
motive to win prestige and power through large economic 
possessions, or the motive to imitate others in following a 
social custom which makes economy more a source of social 
distinction, and extravagance less so, than at present. But 
the organization of motives of frugality moves slowly, and 
against heavy psychological obstacles ; and in spite of much 
preaching and propaganda in favor of thrift, the amount of 
saving among the bulk of the population, particularly the 
laboring classes, remains discouragingly small. The psychol- 
ogy of the situation will be clarified somewhat by a com- 
parison with the psychology of persuading labor union 
members to pay their dues. Labor unions widely insist in 
their collective bargaining agreements, upon what is known 
as the "check-off" system. That is, unions demand that 
union dues be deducted from wages before the wages are 
paid. They desire the employer to ' ' check-off" from the pay- 
roll the amount of the union assessment, because if the 
union has to collect from each individual member, the task 
is fraught with enormous difficulties. The union members 
spend their money for purposes which bring immediate en- 
joyment, and faithful, painful saving to meet union dues 
is a most strenuous virtue. Saving is hard, spending is 
easy. This brief summary of the psychology of the matter 
applies in real measure to incomes which are large enough 
to meet generously the individual's needs and extrava- 
gances; it applies with great force to incomes which are 



192 Capital 

so small as to meet only scantily the individual's major 
wants. In fact, for the lower income groups, it might well 
be said that saving is extremely hard while spending is 
virtually imperative. Cost of living studies on a large 
scale have demonstrated that most working-class families 
spend practically all their income.^ 

As a result of these various factors, the great bulk of in- 
dividual saving is done by the so-called middle classes, 
by the salaried classes and by the property-owning classes. 
Until recently, it was assumed that the savings made by 
individuals of these classes varied in proportion to the in- 
terest rate, but recent studies and observations point to the 
opinion that interest rates have a minor influence upon the 
volume of individual savings.^ Saving which involves real 
abstinence and sacrifice is not due to acquisitive motives to 
secure high interest, but rather to motives to secure family 
protection, economic security, social prestige, or busi- 
ness power. This is not to deny some influence to interest 
rates, and it certainly deserves to be pointed out that with- 
out interest rates the fund of individual savings would be 
inadequate to meet the nation's needs for capital. It is, 
however, a false theory of interest rates to contend that the 
individual saver is motivated primarily by acquisitive in- 
stincts. The motives to saving in the average individual 
are many and complicated, and the possessive motive, stim- 
ulated by interest rates, does not hold a dominant position 
in his group of motives. 

The other source of savings is corporation income. Busi- 
ness men discovered that individual savings would not be 
adequate to finance economic activity and expansion, and 
cast their glance around for a source of savings which would 
supplement individual thrift. They discovered a source of 
savings in corporation income. The net income of a cor- 
poration is rarely paid out in full in the form of profits or 
dividends. A substantial portion of the earnings available 
for dividends are not paid out, but are retained in the cor- 
poration. These retained earnings are then used to invest 

1 Royal Meeker, Monthly Labor Review, Vol. IX, pp. 1-5. 

2 For detailed observation see below, p. 447. 



Capital 193 

in new buildings, new equipment, new capital of any sort. 
Or they may remain as a surplus fund and be invested in 
bonds or stocks of other corporations. In either case, they 
are savings out of the corporate income, devoted to the 
maintenance and increase of productive capital. Suppose 
the funds which are saved in this way were either paid out 
in dividends, or were reduced by charging consumers lower 
prices for goods. The result would be that the recipients 
of the dividends and the consumers who benefited by 
lowered prices, would spend a good share of their gains for 
direct consumption ; they would save only a fraction of the 
gains. On this understanding of the situation, corpora- 
tions have seen fit to adopt very widely the practice of 
tapping income at the source and of **checking-off" savings 
before dividends are paid.^ 

An interpretation of the fourth classification, the propor- 
tions of income for effort and for ownership, necessitates 
a broad analysis of the general institution of ownership 
and property out of which come naturally, steadily, and 
persistently such results. Merely to look about over the 
maze of facts gives no clue to the natural causes of those 
facts. The imperative key to the situation lies in some dis- 
covery of why these facts of wealth and property have come 
to be what they are, why they tend to maintain themselves 
to-day, and whether by the nature of the case they should 
always retain their present origins and consequences. The 
only key which appears to give this clue is a conception 
of ownership of property as a social institution. As 
C. H. Cooley has insisted, ownership and distribution 
are "essentially a historical and institutional phenomenon, 
economic technique being for the most part only a mecha- 
nism through which social organization expresses itself," 
and ' ' pecuniary valuation is a social institution no less than 
the state or the church."^ 

An institution is a group of human tendencies and habits 
working out through an organized structure.^ It is the 

1 For further details, see below, pp. 449-450. 

2 "Social Process," pp. 302, 308. 

3 W. G. Sumner, "Folkways," p. 53. 



194 Capital 

product of history. It has antecedents reaching back 
through generations, and is always in a state of flux and 
change. It is what it is to-day because it was something 
else yesterday, something less satisfying yesterday. It 
will be something different in days ahead because it 
is not fully satisfying to-day. An institution is on 
the march from yesterday forward to to-morrrow. It is 
dynamic. It grows, develops, moves. This is not to deny 
that there are always forces at work trying to keep the in- 
stitution static, trying to preserve the status quo, trying to 
hold things as they are. But this is only the conservative 
side of growth. It combines with another side, — restless, 
forward-looking, dynamic. The two at their best balance 
in wholesome, gradual, safe advance; at their worst they 
fight it out. 

If we view the church as an institution, at its beginning, 
then during the Middle Ages, through the Reformation, 
through the refuge of persecuted groups in the early Amer- 
ican colonies, on through the last century of development 
in America, and finally in its present form, we have a 
fairly clear picture of the dynamic character of the church 
as an institution. Creeds, dogmas, rituals, teachings, the- 
ologies, interpretations, beliefs, constantly moving forward, 
appear simultaneously with organization, denominational 
structure, practice, custom, tradition and innovation.^ It 
is so with the institution of property. Every little while 
a student of economic life throws out the declaration that 
"We are living in a new economic world. "^ In other 
words, the institution is growing. 

Obviously then, the institution of property as it exists to- 
day is not fixed and static in all its detail and method. In- 
stitutions have much the same restless qualities as life. In 
fact, property is nothing unless a way of life. To view 
property as a static order is to miss the true dynamic nature 
of property. This emphasis is carefully stated by do 
Tocqueville in these words, "I am tempted to believe that 
what we call necessary institutions are often no more than 

1 Ross, "Principles of Sociology," p. 489. 
2R. T. Ely, "Property and Contract," p. 34. 



Caplial 195 

institutions to whicli we have grown accustomed, and that 
in matters of social constitution the field of possibilities is 
much more extensive than men living in their various 
societies are ready to imagine."^ 

The study of ownership and property as a great social 
institution will be considered under the following divi- 
sions : 

1. The instinctive basis of the institution. 

2. Property a group of rights. 

3. Ownership as a corporate phenomenon. 

The instinctive basis of the institution of property. The 
whole institution of property would not exercise so domi- 
nant an influence upon the wealth activities of men if it 
were not grounded in powerful traits of human nature. 
Property stimulates and satisfies some of the deepest in- 
stinctive energies of men. 

Of high rank among these instinctive energies is the ac- 
quisitive bent of human nature. The impulse to posses- 
sion is a dynamic human fact behind property. The ca- 
pable organizer, the brilliant manager, the business man 
of whatever sort, is expected to understand as a matter of 
course that the stimulus which will call forth his best ef- 
fort is the unlimited acquisition of wealth. Indeed the 
profit motive is often advertised as in the nature of things 
the only motive which can inspire the truly great captains 
of industry to direct the affairs of wealth. Obviously, the 
profit motive has the advantage that it works. Even 
though it may stress the self-interest of the individual to 
an extreme, even though it seems often to subordinate 
broader social considerations, it certainly works. That is, 
it calls forth strenuous effort, it sets men on fire with en- 
ergy, it commands the keenest brains. It works in the 
direction in which it is intended to work, — the amassing of 
profit and property. 

There is another direction in which it works only indif- 
ferently. The incidental by-product is looked upon as 
socially good. At any rate, when men set out to acquire 
large property, the pathway to acquisition is supposed to be 

1 "Recollections of de ToGqueville," p. 101. 



196 Capital 

paved with economic welfare for the country. Adam Smith 
taught that while seeking his own self-interest, the prop- 
erty-holder would be led as by an invisible hand to serve 
the common good. The theory in this respect has not al- 
ways worked out well. The prevailing opinion among en- 
gineers seems to be that profit seeking hinders production 
and subordinates the real usefulness of the economic or- 
der. For instance, H. L. Gantt writes, "The aim of our 
efficiency has not been to produce goods, but to harvest dol- 
lars. If we could harvest more dollars by producing fewer 
goods, we produced the fewer goods. If it happened that 
we could harvest more dollars by producing more goods, 
we made an attempt to produce more goods: but the pro- 
duction of goods was always secondary to the securing of 
doUars. ' '^ When men become part of an institution which 
impresses upon people that what matters most to a man is 
the amount of property he owns, he is bound to make other 
things secondary. Even though the acquisitive motive 
builds railroads, extends banks, develops mines, and or- 
ganizes factories, and by and through them millions of peo- 
ple get their living, nevertheless the sore spots of the social 
world and the bad fortune of human groups is also an out- 
put of the acquisitive motive. Without losing its drive, the 
profit motive can combine more and more with motives of 
achievement or of public spiritedness. 

Another motive is important, the "will to power." In 
the modern institution of wealth, the surest road to power is 
the gaining of property. Property is power. Large property 
gives prestige and influence with other property-holders; 
it causes one's counsel to be listened to; and it gives the 
ability to use financial force to put through new business 
engagements. The instinct of domination ranks side by 
side with the instinct of acquisition. "In the modern 
world, power is realized more and more through property." 
Hence this driving trait of human nature reinforces the 
profit motive, and both combine in stimulating economic 
activity which drastically stresses self-interest and individ- 
ualistic gain. 

iH. L. Gantt, "Organizing for Work," p. 24. 



Capital 197 

Moreover, property means economic freedom. "For 
man, at all events, his property is above all something that 
he can rely upon as a permanent home, permanent means of 
subsistence or enjoyment. Property is thus -an integral ele- 
ment in an ordered life of purposeful activity. It is, at 
bottom for the same reason, an integral element in a free 
life. . . . Some measure of property appears in short to 
be the essential basis of liberty."^ One who lacks prop- 
erty is always on the verge of trouble and distress. He 
has nothing to fall back upon in case of illness or accident. 
He cannot travel, he cannot enjoy the best amusements, 
he cannot have the best education for his family. He can- 
not take part in the game of business. He is severely limit- 
ed in his life activities. "Without a certain amount 
of accumulated wealth, a man is largely a slave to his im- 
mediate environment." The facts of wealth which have 
already been given show that for the majority of men this 
enslavement to immediate environment is a painful fact. 
They lack the accumulated property which gives indepen- 
dence from the misfortunes and vicissitudes of life among 
the non-propertied levels of society. To win property is 
to win economic freedom. The most nagging worries of 
life drop out. Security is attained. The instinctive revolt 
against restraint and confinement is successful; and the 
love of freedom, the love of fuller psychological existence 
is satisfied. As William Graham Sumner remarked, 
"Wealth, therefore, in a highly organized civilized society, 
gives an emancipation from the ills of earthly life which 
is enormous." 

One of the most insistent movements of the present time 
is for a revaluation of the motives governing property ac- 
cumulation. * ' The community needs service first, regardless 
of who gets the profits, because its life depends upon the 
service it gets."^ Before the service motive, property is on 
the defensive. Property is face to face with the necessity 
for co-ordinating the profit motive with new motives. At 
least, it is challenged with the task of controlling the profit 

1 Ely, "Property and Contract," pp. 308-309. 

2 H.' L. Gantt, "Organizing for Work," p. 5. 



198 Capital 

motive witli social thoughtfulness. At first, the reaction 
to such a challenge is that a service motive or constructive 
motive, or public achievement motive will not work, that a 
creative motive- is inadequate. These substitutes are not, 
so it is said, rugged, and virile, and tremendous. How- 
ever, it is conspicuous that motives of creative achievement 
and public weU-being have played a primary part in the 
motivation of such indispensable economic groups as the 
inventors and engineers. Among the professional classes, 
the profit motive is placed under subjection. Surely, then, 
the proposed substitutes are not as weak and flabby as 
they might at first have seemed. One of the vital contribu- 
tions of psychology to economics is the scientific assurance 
that the substitute motives have true dynamic quality, and 
do not menace the business game with a milksop mental 
outlook.^ 

Such a revaluation of motives throws light on the claim 
that property as now constituted is a great developer of 
personality. The race for property accumulation develops 
foresight, self-reliance, initiative, self-respect, and a long 
list of other virtues of personality. But unquestionably it 
at the same time encourages certain vices of personality, — 
such as excessive self-interest, misconception of the primary 
importance of the public need, and false valuation of all 
the qualities of life in terms of self -gain. But what of the 
propertyless man? Surely property is not a developer of 
personality for him. As a keen observer has remarked, 
"Thus it has come about that the Society which boasts 
of its reliance on the freedom of individual self-develop- 
ment nevertheless allows only a limited proportion of its 
individual members to possess the freedom. It appeals to 
the moralizing influence of ownership ; and then denies the 
possibilities of any real ownership to the main mass of its 
members."^ The forces of the times demand that property 
must be less an individualistic influence on personality and 
more a social influence. Personality is a social product, 
and a wider distribution of property, combined with a re- 

1 A. E. Zimmern, "Nationality and Government," pp. 259-260. 

2 See Hobhouse, "Property, Its Duties and Rights," p. 184. 



Capital 199 

adaptation of more social motives in its accumulation, is 
the general urging of the forces now at work. 

If these considerations are sound, it is proper to d«-fine 
economics as the science of making material wealth con- 
tribute most to human welfare. The function of the in- 
stitution of property is then to serve human life. If this 
involves a gradual transformation of motives and ideas be- 
hind property, then the transformation should be made 
in the smooth process of economic growth.^ If the self- 
regarding instincts have to give way to creative and ser- 
vice instincts somewhat, the adjustment is a part of the 
evolution of an institution. We may as well face squarely 
the fact that the present instinctive basis of property is 
not all that it should be. That does not mean a drastic, 
quick, shocking change. Property is an institution. Men 
have in the past been able fairly well to reshape institu- 
tions to the facts of human nature when the times have 
gotten out of joint, and should be able to do so again.^ 

Property a Group o£ Rights 

Property has been defined as ''a bundle of rights." 
There is no more conspicuous feature of the institution of 
property than this overwhelming emphasis upon the rights 
of property.^ "When the American Constitution was es- 
tablished, and the foundations of the American system of 
government and property laid, the period was one which 
teemed with the philosophy of natural rights. European 
countries, France particularly, were just experiencing the 
sensation of having thrown off old authorities, traditions 
and customs. The new freedom was akin to the freedom of 
the American Eevolutionary group, and it furnished a 
soil in which there flourished an extreme doctrine of the 
individualistic rights of all men to life, liberty and the 
pursuit of happiness. Accordingly property became a set 
of exclusive rights. The property owner had inalienable 
rights to do with his property as he pleased, subject only 

lA. E. Zimmern, "Nationality and Government," p. 174. 
2D. G. Ritchie, "Natural Rights," p. 277. 
3 R, T. Ely, "Property and Contract," p. 60. 



200 Capital 

to a minimum of restraint from excessively anti-social 
practices. Property was something to be let alone by 
society. It bad inalienable rights to be let alone. Prop- 
erty rights were individual rights, and this conception col- 
ors deeply the whole institution of property down to the 
present day. 

One weakness in this theory of property rights has be- 
come very prominent, namely, the implication that "the 
foundation of society is found, not in functions, but in 
rights; that rights are not deducible from the discharge of 
functions, so that the acquisition of wealth and the enjoy- 
ment of property are contingent upon the performances of 
services, but that the individual enters the world equipped 
with rights to the free disposal of his property and the pur- 
suit of his economic self-interest, and that these rights are 
anterior to, and independent of, any service which he may 
render."^ Rights come first and responsibilities second. 
Property is thought of primarily as a bundle of rights, 
but not emphatically as a bundle of duties. And the rights 
acquire a certain sacredness and awfulness. They com- 
mand a sort of religious reverence which will not bear 
analysis. Such rights it seems sacrilege to question. In 
this atmosphere, it is hard to make a clean-cut mental ap- 
proach to the problem of property and find just what it is 
all about. As a matter of fact, the so-called rights are 
simply rules of the institution ; and if the rules are capable 
of improvement, then a blind awe of ancient rights should 
not stand in the way. The rules of the game are being 
tried out. There is nothing absolute and unapproachable 
about them. They deserve to be freed from superstition 
and treated with the same common sense which men use 
in coping with everyday problems of life. A proper in- 
fusion of duties, obligations, and responsibilities is indis- 
pensable, and an unquestioning reverence for rights as 
rights must give way to a proper spirit of accommodation 
of the property institution to the needs of the present 
period. 

One phase of these rights is the right to acquire property. 
IE. H. Tawney, "The Acquisitive Society," p. 20. 



Capital 201 

Men have the right to engage in business, make profits, 
save their income, invest, and accumulate. This right 
has encouraged the boundless initiative and energy of 
the business community. It gives a powerful impetus 
to primary instincts and arouses the ablest men to the 
most strenuous business endeavors. It has a similar effect 
upon middle-class shop-keepers and to a large extent upon 
farm groups. It has however a scant effect upon a sub- 
stantial proportion of the wage groups for the simple rea- 
son that the size of the wage does not permit the accumula- 
tion of any great amount of property. The average wage 
earner does not hold a faith that some day he will be rich; 
he expects to remain a wage earner the rest of his days. 
Workers here and there with extraordinary instinctive and 
mental endowment, force their way from the bottom to the 
top, and acquire a large amount of property in the course 
of a life time. The rank and file of laborers, however, 
have given up any such aspiration. It will be noticed also 
that among the business groups, this right to acquire wealth 
enjoys a high degree of freedom from public interference. 
A man has the right to acquire wealth by manufacturing 
luxury automobiles when city populations are in dire need 
of housing. Men are very commonly engaged in manu- 
facturing commodities which are the least needed by the 
great bulk of the population, because it pays better to 
produce those goods, and they have the right to produce 
whatever yields for them individually the highest net in- 
come. The Government organization in war time tem- 
porarily annulled this right and demanded that non-essen- 
tials should not be made when essentials were needed to 
win the war. Industries which insisted on producing non- 
essentials found their coal supply cut off by the govern- 
ment, or requests for credit refused. And most business 
men were willing to give up for the time being the right 
to produce goods which would not help win the war. 
But during peace times, there is no slogan equivalent to 
''Win the War." To produce essentials first, and on a 
quantity basis at minimum prices to the mass of consumers 
would obviously be the paramount desideratum from a so- 



202 Capital 

cial viewpoint. But at the end of the war business men gave 
a sigh of great relief when the war-time government boards 
were abolished, and everybody was free again to acquire 
wealth as he pleased, on the old laissez-faire basis, in what- 
ever line brought individually the highest net income. The 
social forces at work to-day are not pressing for an aboli- 
tion of the right to acquire property, but they are decidedly 
at work to make peace-time production amenable to some 
kind of social control more or less equivalent to the war- 
time control contained in the slogan "Win the War." 
There is a social principle superior to the mechanical play 
of individualistic rights in the seeking of property. Pri- 
vate parties assume that it is sound policy to produce what- 
ever pays best, whereas from a public viewpoint it is 
sound policy to produce whatever is needed most. As a 
matter of fact, it often occurs that what pays best is not 
what is needed most, — hence a shortage in housing or in 
railroad equipment. The right to acquire property requires, 
therefore, a degree of social control. 

The right to unlimited income. — A very pertinent ques- 
tion would be, ''How much wealth can a man accumu- 
late?" In the popular phrase, the answer might well be, 
''The sky is the limit." After taxes have been paid and 
costs have been met, his income belongs to him alone, 
whether it be $3,000,000 a year or $3,000. The property 
right to income means in terms of everyday action that 
a man is entitled to all he can get. This unlimited right 
supplies a perpetual stimulus to the instincts underlying 
property : they are never satisfied and never reach a limit. 
No matter how much the individual may acquire, he al- 
ways has the right to acquire more. At the same time 
that this right calls forth strenuous business endeavor, 
it also causes those excessive returns claimed by profit- 
eers, usurers and over-avaricious landlords. The right 
to income is a right to good and bad income alike. Even 
during war time the right to income was not seriously 
invaded. Government reports disclosed gross profiteer- 
ing throughout the war in many business circles, and after 
the armistice, profit figures of 50 per cent., 100 per cent. 



Capital 203 

and even thousands of per cent., were frequently reported 
by government authorities.^ Unless this positive right is 
balanced by a commensurate sense of social responsibility, 
it inevitably leads to dangerous excesses. ^ * ' The heresy 
which condemns our economic life is this, that business is 
primarily a means of making wealth for individuals. It 
involves us in industrial bitterness. The truth which alone 
can bring decency and happiness is this: that business 
primarily is an essential social service to the community. ' '^ 
The right as now exercised has deepened in the minds of 
groups of people, especially of wage groups, the conviction 
that employers and property owners are steadily using 
strong efforts to exact unreasonable returns for individual 
gain. Unrest and bitterness are greatly stimulated, and 
laborers tend to reason that hard work on their part does 
not insure a commensurate return to them, but leads all 
too often to the property owner reserving for his own 
fortune the lion's share of the increase. The economic 
community has drifted to a point where the emphatic 
demand is that wealth-seeking must be tempered more 
genuinely with a social purpose. 

The right to security of property and income. — Prop- 
erty ownership is deeply entrenched behind the accepted 
social philosophy and the law of the land. What men 
have the right to acquire, they also have the right to 
hold. The Federal Constitution provided at the outset 
that there should be no taking of private property with- 
out due process of law. It also provided that no State 
could pass a law impairing the obligation and freedom 
of contracts. By the decision of the Supreme Court, 
headed by John Marshall, in the Dartmouth College case 
of 1819, a corporation which had received a charter from 
the State could hold the charter indefinitely, and the 
charter was not subject to repeal by the State. Once 
a privilege was granted, it was granted in perpetuity. Fol- 

1 J. G. Brooks, "Labor's Challenge to the Social Order," pp. 
75-85. 

2R. T. Ely, "Property and Contract," pp. 369-371. 

3 General Sir Arthur Currie, before Canadian Pulp and Paper 
Assoc'n, 1920. 



204 Capital 

lowing the Civil War, the Fourteenth Amendment to the 
Constitution was passed guaranteeing to all persons equally 
the protection of the laws, and when in 1882 the Supreme 
Court declared a corporation to be a person, the corporate 
personality was firmly protected in its property holdings 
by the power of the Federal Government. The net out- 
come is summed up by a conservative American author- 
ity, A. T. Hadley, as follows, "The general status of the 
property owner under the law cannot be changed by the 
action of the legislature or the executive, or the people 
of a State voting at the polls, or all three put together. It 
cannot be changed without either a consensus of opinion 
among the judges, which would lead them to retrace 
their old views, or an amendment of the Constitution of 
the United States by the slow and cumbersome machin- 
ery provided for that purpose. The voter was omnipotent 
— within a limited area. He could make what laws he 
pleased, as long as those laws did not entrench upon 
property rights. He could elect what officers he pleased, 
as long as those officers did not try to do certain duties 
confided by the Constitution to the property holders."^ 
Property becomes under these conditions a vested in- 
terest. — "An interest is vested when it must receive in- 
demnification, if it is impaired by public action, directly or 
indirectly. . . . Vested interests are largely property in- 
terests. ' ' 2 The rights of vested interests have not always 
been strictly upheld. The abolition of slavery was a denial 
of the vested interests of the slaveholder inasmuch as 
no indemnification was given. The parcels post encroached 
upon the vested interests of the American express com- 
panies, and the postal savings banks upon the vested inter- 
ests of private banking institutions. The prohibition 
amendment to the Constitution was a sweeping blow at the 
vested interests in the liquor business. Social necessity in 
each case took priority over the vested interests. But 
these are exceptions. The Courts interpret the Constitution 

1 The Independent, April 16, 1908. See also S. P. Orth, "Relation 
of Government to Property," pp. 7-84. 

2R. T. Ely, "Property and Contract," pp. 755-756. 



Capital 205 

in terms which safeguard property against confiscation. 
Any other attitude by the courts would shatter economic 
confidence and would discourage men from hard business 
endeavor. In war time, conscription of income was held 
to be an unwise interference with vested interests. Social 
progress which impairs the value of property has to re- 
imburse the property holder. Hence the courts insure 
a reasonable degree of security to the owners of wealth.^ 

In another form, the right to security amounts to the 
right of an uninterrupted income. A business cannot 
continue unless it steadily meets rent, interest and profits 
charges. "Capital is based upon security of expectations. 
The investor has confidence that his investment will be 
returned to him, that promises will be kept. That is the 
great producing factor in modern industry. " ^ If property 
is entitled to an assured income, then why should not labor 
have the same assurance? As Commons declares, "Now 
capitalism is to blame because it has not offered, as yet, 
to labor that security of the job which it has offered 
to the investors in the security of their investments. Cap- 
italism is threatened because it has not furnished the 
working people a similar security to that which it has fur- 
nished the investors."^ Steady employment, industrial in- 
surance and a living wage are indispensable to the security 
of the wage worker. ' ' This need for security is fundamen- 
tal, and almost the gravest indictment of our civilization is 
that the mass of mankind is without it."* The property 
right to security must be matched by a human right to se- 
curity, for otherwise the one-sided insistence upon prop- 
erty rights leads the community into deeper and deeper 
social troubles. 

The right of property to industrial control. — Property 

carries with it the right of self-management. The owners 

of capital by tradition and custom have the right to control 

and direct the business. Labor carries no such inherent 

right. The labor movement is thus in a large degree a 

iR. T, Ely, "Property and Contract," pp. 755-790. 

2 J. R. Commons, "Trade Unionism and Labor Problema," p. 8. 

3/6id., p. 8. 

*R. H. Tawney, "The Acquisitive Society," pp. 72-73. 



206 Capital 

determination to give labor the same right as that now 
claimed by property. A large number of employers have 
already voluntarily undertaken experiments with various 
forms of employee representation in an endeavor to work 
out safe and sane principles and plans for labor's partici- 
pation in certain problems of management. The labor 
movement is a flat denial of the exclusive right of prop- 
erty to hold the power to run the business. The laborer 
invests his life in the business and feels that this is as 
good a claim to a voice in the control of the business as 
the possession of a certain number of shares of stock. 
The whole force of the labor movement is a demand that 
the right of industrial control must be shared. 

The right of freedom of contract. — American courts have 
usually interpreted contract rights as property rights, be- 
cause private property is commonly acquired through con- 
tract.^ The common view is that freedom of contract is a 
province wherein the individual is to be let alone. "His 
right to contract freely is to yield only to the safety, 
health, or moral welfare of the public. ' ' ^ But in the eyes 
of property-owners, the fewer such restraints the better. 
The maximum of individual freedom of contract and the 
minimum of social restraint are taken as the accepted ideal. 
This right of freedom of contract is so firmly entrenched 
in judicial tradition and in legal statute that virtually all 
social legislation has to run a gauntlet of the courts before 
it can win a status of legality. Such social legislation is 
frequently held up for from 10 to 20 years because at first 
shock it limits freedom of contract. At the present time 
a State is unable to pass a law protecting a workman, who 
desires to join a union, from discrimination at the hands of 
his employer. The law is declared by the court to impair 
the freedom of contract of the employer. This guarantee 
of freedom of contract is also a guarantee of inequalities 

iR. T. Ely, 'Troperty and Contract," pp. 53-54. 

2 See Roscoe Pound, "Liberty of Contract," Yale Law Journal, 
Vol. XVIII, 454-87. Also see F. J. Goodnow, "Social Reform and the 
Constitution," Vol. XXXIII, and T. R. Powell, "Collective Bargain- 
ing before the Supreme Court," Political Science Quarterly, pp. 
396-429. 



Capital 207 

of fortune. The United States Supreme Court asserts, 
"Wherever the right of private property exists, there must 
and will be inequalities of fortune." It is "impossible to 
uphold freedom of contract and the right of private prop- 
erty without at the same time recognizing as legitimate 
those inequalities of fortune that are the necessary result 
of the exercise of those rights." In other words the in- 
equalities of wealth are woven into the institution of prop- 
erty, and are inseparable from it. 

The equal right to freedom of contract means the equal 
right to be let alone by public authority. The insistence 
upon the individualistic exercise of the right has led to a 
serious complication since the development of great organi- 
zations of labor and capital. A contract between an in- 
dividual immigrant worker and the United States Steel 
Corporation with its scores of subsidiary companies and a 
property value of upwards of $2,000,000,000, was not fore- 
seen by the framers of the constitutional guarantees of 
freedom of contract. Such a contract can scarcely be con- 
ceived as one entered into between equals. Before the law, 
the corporation is an individual person, but in social and 
industrial fact, it is a colossal aggregation with many times 
the bargaining power of any individual laborer. The sig- 
nificance of the labor demand for collective bargaining is 
that the labor group desires to wipe out this actual in- 
equality of bargaining power, and make possible a labor 
contract between equal groups. Group freedom of contract 
is quite different in principle and effect from individual- 
istic freedom of contract and the form in which society 
will accept group freedom of contract remains to be deter- 
mined. Group freedom of contract is not guaranteed by the 
law of the land as at present interpreted by the courts. 
This matter is the center of a huge amount of bitter dis- 
pute between employers and employees, and is one of the 
most dynamic spots in the whole institution of property 
rights. ^ 

iR. T. Ely, "Property and Contract," pp. 561-732. See also 
Sections I, II, III and VI of Orth's "Relation of Government to 
Property." 



208 Capital 

The bundle of rights, therefore, which enters into the 
property institution, is faced to-day with a number of 
severe challenges. The paramount traits of the social 
forces in regard to property may be summed up under 
two headings : first, that property rights must be balanced 
by property duties and responsibilities; and second, that 
group rights and social needs shall take precedence over 
purely individualistic rights wherever the two conflict. At 
these two points the institution of property is in process of 
a great institutional evolution, and the transformation in- 
volved has social and economic consequences of the great- 
est magnitude. 

The foregoing discussion has been directed to the 
psychological and legal aspects of the institution of prop- 
erty ownership. The following discussion is directed to the 
structural phase, and concerns itself with the corporate 
form of ownership, since the corporate form of ownership is 
the main one in the present economic system. 

Ownership as a Corporate Phenomenon 

Ownership through bonds and stocks has largely dis- 
placed the old personal direct ownership of property and 
has become the typical form of ownership in modern organ- 
ized industry. This evolution in ownership was indispen- 
sable to the development of modern production, commerce 
and finance. Without the corporate form of ownership it 
is inconceivable that the modern economic system could 
have been constructed. "Although merely an immaterial 
form, it has nevertheless wielded an economic and social 
influence greater than any other purely conceptual entity 
of the last century. The contribution of the corporation 
to the evolution of the form of modern industry has been 
no less potent than that of machinery to its technique. ' ' ^ 

Corporation methods allow for a scattering of ownership 
with a concentration of control. The scattering of owner- 
ship is carried to remarkable lengths. In a typical large 
scale enterprise, the owners of securities are scattered 

1 A. Dewing, "The Financial Policy of Corporations," pp. x-xi. 



Capital ^00 

throughout most of the States of the Union, and through a 
number of foreign countries. People in Brazil, Japan, 
California and New York are owners of the securities of the 
typical large corporation of Pennsylvania or Ohio. Men 
and women, wage workers and farmers, savings banks and 
insurance companies, multi-millionaire estates and corpo- 
ration executives, lawyers and doctors, all and severally own 
a few or a great many shares of securities, and this grand 
miscellany in its totality is the ownership of the corporate 
property and undertaking. At the same time, the execu- 
tive control and direction of the corporate property is high- 
ly concentrated. A controlling amount is owned by special- 
ly interested parties and the votes of the remaining security 
holders are merely nominal votes. These major interests 
manage to secure a satisfactory Board of Directors, this 
Board in turn giving over the administrative tasks of the 
business to appointed executives. This highly concen- 
trated control enables men of high initiative and powerful 
instincts of acquisitiveness, achievement, domination or 
rivalry to have at their disposal the accumulated savings 
of masses of people. 

In 1917, there were 345,047 corporations listed on the 
records of the Bureau of Internal Revenue, representing 
a total capitalization of about one hundred billion dollars, 
approximately one-third bonds and two-thirds stocks. 
Bonds appear in a variety of forms, but have one basic 
principle in common, namely, they are secured by a mort- 
gage on definite property or have prior claims on the gen- 
eral assets and credit of the corporation. Backed by such 
a security, the bond is the corporation's promise to pay the 
investor interest on a certain sum of money for a stated 
period of time, at the end of which time the corporation 
promises to pay back the sum originally borrowed. The 
stockholders have a right to the income or property of the 
corporation only after the claims of bondholders are sat- 
isfied. As a rule the security behind stocks is secondary 
and inferior, but the rate of income is commonly higher. 
People who invest in bonds are usually more interested 
in the safety of their money than in high income ; whereas 



210 Capital 

people who invest in stocks are willing to sacrifice some- 
thing of safety for the sake of securing large income. 

The corporate form of ownership facilitates the exer- 
cise of the basic property rights. — The right to acquire 
property is made easy of exercise for anybody who is able 
and willing to save money. Bonds run in denominations 
from $50 to $1000 and stocks from $5 to $100 par value. 
Partial payment plans enable the investor to buy stock, if 
he chooses, in essentially the same way that he may buy 
furniture, — on the installment plan. Savings banks, in- 
vestment banks, bond houses, stock exchanges, underwrit- 
ing syndicates, all provide a ready opportunity for invest- 
ment for both large and small sums. The wool grower in 
Australia can acquire the property of the Pennsylvania 
Railroad and the wage worker of Pittsburgh can acquire 
the property of English iron works. The farmer in Kan- 
sas can acquire the property of Pennsylvania coal mines, 
and the bank president of New York City can acquire the 
property of Brazilian coffee companies. If the would-be 
investor has the money wherewith to buy, he can have 
bonds or stocks, and no questions asked. The investment 
market is organized to attract investors, and corporations 
vie with each other to draw the funds of investors toward 
their securities. 

The right to income is likewise facilitated by the corpo- 
rate form of ownership. The bondholder is entitled to his 
interest and the stockholder to his dividends. The assur- 
ance of income stands as one of the primary inducements 
to investment. Over 160,000 individual stockholders draw 
income annually from the United States Steel Corpora- 
tion, and about 140,000 draw income from the Pennsyl- 
vania Railroad. Income on bonds in the form of in- 
terest must be paid at all costs; dividends on preferred 
stock must be paid unless the financial status of the com- 
pany makes payment unwise; dividends on common stock 
are paid only in case there is enough left over to make the 
reward possible. The right to income is not absolute, ex- 
cept in regard to bonds. Dividends involve more or less 
of the risks attached to profits. But without the assurance 



Capital 211 

of immediate or ultimate dividends money will neither be 
put in nor kept in stocks. Common stocks carry the possi- 
bility of unlimited income, and many of the great fortunes 
owe their success in large measure to skill and luck in 
managing the risks of the common stock adventures. To a 
considerable extent, moreover, these investments are not 
so much an investment in property as in earning power. 
Good will, intangible assets, earning capacity, etc., are com- 
mon factors in stock issues, and mean simply that the man 
who buys them buys the right to an income in the future. 
If the buyer went to the establishment of the corporation 
and asked to see his property, no one could show it to him. 
He would not own machines, or buildings, or raw or fin- 
ished material. He would own earning capacity, an intan- 
gible concept, but nevertheless a reality on dividend day. 
But as a matter of fact the average owner of stock would 
never think of going to the corporation's plant and asking 
to see his property. He bought the right to an income 
and cares little or nothing where it comes from. He bought 
dividends, not tangible property. So long as dividends are 
forthcoming, his purchase of the earning power justifies 
itself. The stock purchaser may anticipate, at the same 
time, that a rise will occur in the market value of his stock. 
If he can, by holding it, sell for more than he paid, the dif- 
ference represents gain. 

The right to security is safeguarded by the courts in ap- 
plying the State and Federal Law to corporate property. 
A corporation is a legal person, and no person shall be de- 
prived of property without due process of law. Banks, 
Bond Houses, and the Stock Exchanges set out to take 
reasonable precautions against wild-cat speculations, and 
endeavor to protect their customers from fraudulent stock 
flotations. The bonded property of the country is power- 
fully entrenched behind legal barriers, and property once 
acquired by the corporation, whether by fair means or un- 
fair, is entitled to full protection by the law. The right to 
security has a deep psychological basis. Temperaments 
among buyers of securities vary immensely. Some buyers 
want their principal to be absolutely safe, and for buyers 



212' Capital 

of their moods, bonds of one sort and another are avail- 
able. Others are not extreme sticklers for safety, but with 
a moderate anxiety for safety, they combine an instinc- 
tive fascination for higher income. For these groups, pre- 
ferred stocks are the main forms of securities. Others of a 
speculative bent are willing to take a fairly large risk on 
common stock in the hope that the dividend returns will 
be extraordinary. The range from safety to risk covers all 
degrees and variations and offers stocks and bonds to satisfy 
the temperaments, moods or whims of all comers. In these 
forms, corporate securities enjoy the protection of limited 
liability^ — that is, in case of the financial failure of the 
corporation, each shareholder is liable only to the amount 
of his shares. Moreover, the entire status of the stock- 
holder is described in a charter of incorporation granted 
by the State, and the position of the stockholder is thereby 
definitely recorded in a legal document.^ The net out- 
come of the corporate system is to give the holder of stocks 
and bonds a fairly high degree of safety for his principal 
and a maximum assurance of uninterrupted interest or 
dividends. 

The right of self-management is obtained in the cor- 
porate system in a way which makes for high concentra- 
tion of control. Corporation management is founded upon 
the inertia of the average stockholder. Theoretically, each 
shareholder has the right to vote for the directors, but 
in actual practice, the shareholders are a scattered, dis- 
united mass, and the majority of them leave the effort 
of choosing directors and running the business to some- 
one else. "It is a well-known fact of American finance 
that, if the majority shares are scattered, a rather small 
minority of the stock held by an individual shareholder, 
or a little group of shareholders working together, can con- 
trol the corporation almost as surely as if they held an 
absolute majority of all the stock outstanding. . . . The 
more shareholders there are in a particular corporation the 

1 Lyon, "Capitalization," pp. 9-12. 

2 L. H. Haney, "Business Organization and Combination," p. 109, 
Chapters VI-Vl'l. 



Capital 213 

fewer shares can control. . . . From a quarter to a third of 
the shares of an American corporation will usually assure 
control."^ The right of owners to self -management of 
property amounts then in actual practice to throwing the 
management of the corporation into the hands of active 
minority interests. By the proper organization of holding 
companies, interlocking directorates, and other devices, the 
owners of a few million dollars' worth of stock can control 
and direct hundreds of millions of dollars of other peoples' 
stock. This situation is enhanced by virtue of the fact 
that the bondholder forfeits any active voice in the man- 
agement of the business. He becomes a creditor of the 
corporation and his money is treated as a loan. He has 
no vote for the directors of the business, and can assert his 
voice only in case the insolvency of the corporation is 
threatened or actually reached. In the railroads, bonds 
amount to considerably more than half of the total capi- 
talization, and hence it follows that the majority hold- 
ers of the property of railroad corporations have no active 
voice in railroad management.^ In addition to these ar- 
rangements, modern corporation policy tends to give to the 
common stock owners the exclusive right to vote for direc- 
tors. The preferred shareholders thereby surrender the 
right of franchise and occupy essentially the position of the 
bondholders so far as voting is concerned; and the entire 
direction of the corporation is given over to the common 
stock interests. When it is remembered that the common 
stock represents, primarily, intangible assets, good will, 
earning capacity, but not tangible property, it is obvious 
that this arrangement serves to place the real power of 
management of the whole corporate property in the hands 
of those who own good will. This arrangement has become 
so widespread that a recent author declares, "Practically 
without exception, the common stockholders manage the 
business and receive the largest share in the profits."^ 
Consequently the right of self-management exists for 

iLyon, "Capitalization," pp. 9-15. 

2 Dewing, "The Financial Policy of Corporations," pp. 34-134. 

3 Jordan, "Investments," p. 14. 



214 Capital 

the great mass of corporate owners only on paper ; in reality 
it is a dead letter. The scattered security owners are ab- 
sentee owners, and know nothing and are expected to know 
nothing of the actual working of the corporation. They 
own a paper certificate, and receive dividend or interest 
checks, and care not a whit whether they ever see the 
corporation so long as the income is forthcoming. Then, 
too, the owner may not hold the security for any con- 
siderable period of time. In a single year the common 
stock of the United States Steel Corporation changed 
hands so rapidly that nearly 32,000,000 shares were bought 
and sold. Some buyers hold their securities for years, 
others for weeks or days or minutes. It is all the same to 
the corporation, for its policies go on without regard to 
how fast the mass of scattered shares change hands. The 
instincts of ownership in this arrangement are quite dif- 
ferent from the instincts prevailing in the farmer who 
may both own and till his land, or the small shopkeeper 
who is both owTier and manager of his establishment. 
Corporate organization has divorced management from the 
bulk of ownership. 

Ownership becomes under these conditions an extremely 
impersonal affair. It becomes mainly the right to tuck 
savings away where they will be fairly safe, where some 
scantily known interests may manage them, and where they 
will draw out of the business certain pay checks every 
three to six months. The duties of ownership are faint. 
The security holder acknowledges no responsibility for 
profiteering, monopoly discriminations, unfair competition, 
long hours, low wages, bad labor conditions, or unsocial 
business policies. If by any chance he does become inter- 
ested in these phases of corporation activity, he may wash 
his hands by selling out, and allowing some other party to 
draw what seemed to him the tainted dividends, or he 
may vote for a new President or Governor who promises 
new laws regulating bad business practices out of corpora- 
tions. But he would practically never undertake to whip 
up an interest in the issue among the scattered horde of 
shareholders. To the security owner, most of the people in- 



Capital 215 

volved in the actual business are unknown quantities. The 
managers of the various phases of the business, the labor- 
ers in the factory or the mine, the salesmen, the engineers, 
the accountants, the vice-presidents, — all of these are stran- 
gers to the shareholders. There is no personal touch be- 
tween workers and owners, no common understanding, no 
mutual contact.^ It is an impersonal relationship, and 
necessarily so, because of the motives which lead men to 
put their money in corporate securities and because of their 
inertia in leaving to minority interests the management of 
the property.^ 

The entire corporate system is the primary structural part 
of the modern institution of property. Its results are both 
good and bad. The unsocial policies of many corporations, 
the frequent exaltation of profits above considerations of 
use and service, the manipulations by inside interests, and 
the apathy of the real owners are the natural outcome of 
the present form of the corporate organization. The in- 
stitution works out to such ends. On the other hand the 
corporate type has accomplished the efficiency of the pres- 
ent industrial system. It has stimulated initiative, ambi- 
tion, and aggressiveness ; and has made it possible for lead- 
ers of great ability to work in industry with the savings 
of millions of people. It has applied science and invention 
to the services of production, and has made the economic 
order what it is to-day. These items of description of the 
methods and processes of the corporate institution present 
a picture of the corporation in action. This picture will 
serve as the basis for a discussion of fundamental business 
problems in later chapters. 

The fifth classification, namely, the distribution of the 
national income between wages, rent, interest and profit, is 
explained through the principles of minimum and surplus. 
This explanation views the national income as a national 
stream, a fractional part of which is diverted into each of 
the channels known as wages, rent, interest and profit. 
The broad principles of minimum and surplus give a rea- 

1 See Hobhouse, "Property," pp. 22-23. 

2 On this general subject, see also pp. 244-253. 



216 Capidi 

sonably serviceable explanation of the size of the fraction 
which goes for each of these purposes. 

The Principle of Minimum 

For the maintenance of the national economic organi- 
zation, it is necessary that labor, land and capital be com- 
bined in right proportions. A co-ordination of these 
elements is necessary in order to secure a balanced in- 
dustrial system. An excess of land in proportion to labor 
employed would bring inefficiency and waste ; a shortage of 
capital in proportion to labor would diminish productive 
efficiency; a shortage of any element or an excess of any 
one element brings waste and loss. The industrial system 
works well just to the extent that the primary economic 
elements are brought together in the most advantageous 
relative amounts. The income assigned to each element 
must, at the very least, be enough to draw out enough of 
that element to suffice for the balancing of the industrial 
system. The minimum share of the total national dividend 
given to labor must be enough to draw an adequate supply 
of efficient labor into productive employment. The mini- 
mum share given to owners of land must be enough to 
draw an adequate supply of productive agricultural soil 
and of improved land sites for all economic purposes. The 
minimum share given to capital owners must be enough to 
draw an adequate supply of capital in the form of mechan- 
ical equipment, buildings, transportation machinery and 
the like. The minimum share given to each element must 
be enough to bring an adequate supply of that element into 
active economic use. An adequate supply is a supply that 
balances the economic system in terms of efficiency, pro- 
ductivity and greatest returns. 

But the minimum return is not uniform for all laborers, 
all land owners, all capital owners. The minimum wage re- 
turn varies with different grades and classes of labor, 
depending upon gradations in standards of living, in effi- 
ciency of workers, in training and intelligence, and in at- 
tractiveness of work, severity of work, and type of work. 



Capital 217 

In each grade of workers, if a cut in wages is made below 
the minimum level for that grade, some workers will quit 
the industry, whereas others will stay on reluctantly at the 
low figure. The quitting of a number of the workers will 
deplete the labor force in that industry, and the shortage 
of labor will unbalance the industrial organization. In 
other words, a cut of wages below the minimum level for 
each grade and type of work will not cause all workers 
to drop out of the industry in unison, — unless of course 
they deal with the wage issue as a union and quit by strik- 
ing, — but will drive out first a few of the workers who are 
unable to support their families at the new figure, or who 
can find better wages at other lines of work, or who for any 
reason are too dissatisfied with the work to remain in that 
employment. There is a point beyond which wages can- 
not fall without reducing the supply of labor so greatly as 
to destroy the balance of the industrial organization. 

The principle of minimum applies in a similar way to 
land and capital. A reduction of the share of national 
income apportioned to land owners below a certain mini- 
mum point will cause land owners to withdraw their land 
from use and to abstain from making improvements. The 
first degree of reduction below the minimum will not per- 
suade all land owners to follow this course of action at one 
and the same time, but it will persuade first a group of 
land owners whose land is so poor in quality or so un- 
favorable in location or so high in cost of operation that 
they can no longer afford to put their land in use. The 
supply of land will become inadequate and the balance of 
the industrial system will be destroyed. Likewise, a cut 
in interest or dividends below a certain minimum will 
persuade a number of property owners to withdraw from 
industrial activity. Their withdrawal will cause a famine 
of capital and the industrial system will be thrown out of 
joint. In brief, there are certain minimum terms of reward 
which are imperative if enough labor, land and capital 
are to be brought into economic use. Any drop of income 
below the minimum will drive out the workers, land own- 
ers, and capital owners who are most easily persuaded to 



218 Capital 

go, and will thereby cause a dearth in the supply of that 
particular element. 

This principle of the minimum applies equally to each 
separate line of industry and commerce within the nation, 
and to the economic organization of the whole nation as 
a unit. If wages of labor in steel mills are reduced below 
a certain point, a defection of workers will begin in the 
steel mills, and the men who have quit the steel industry will 
endeavor to enter other lines of industry where wages 
are above the minimum acceptable level. If the return on 
land used in house construction is below a requisite mini- 
mum, land owners will refuse to build, or will persuade 
factories to use the land instead of house contractors. If 
interest and profit in the railroad industry fall below a 
minimum, people with money to lend or invest will seek 
to place it in another line of industry where the return is 
acceptable. Hence the principle of the minimum tends 
to compel a constant adjustment of the return for land, 
labor and capital in each branch of industry on the basis 
of the minimum of return necessary to retain in that 
branch of industry an adequate and balancing supply of 
each element. 

But suppose all branches of industry reduced the income 
of labor, land owners or capital owners at one and the 
same time. In that case, the disgruntled laborer, of course, 
could not turn from a low wage industry to a high wage 
industry, because there would have been a simultaneous, 
corresponding reduction in all industrial fields. Or sup- 
pose interest, rent or profits fell below the commonly 
set minimum for all fields of economic activity. The re- 
sult would be first of all to drive labor or capital out of 
the country. Emigration of labor would occur and capital 
would seek investment in foreign countries. Land could 
not be exported, but the upkeep of land would not pay, and 
it would rapidly develop a run-down condition. In short, 
a certain minimum level of return for each element of the 
economic organization is imperative if it is to maintain a 
proper co-ordination and balance. 

It is well to point out that although land and capital 



Capital 219 

differ in the respect that land is given by nature and capital 
is produced by the economic handiwork of man, neverthe- 
less the two are identical in fundamental respects. Practi- 
cally all land in use at present has had improvements made 
upon it so that its original qualities and values as given 
by nature have been augmented and improved upon by the 
economic handiwork of man. It is estimated that fully 40 
per cent, of land values are due to improvements on real 
estate. Because of this fact, the principles of minimum 
and surplus apply in substantially identical ways to both 
land and capital. 

The principle of surplus rests upon the gradations in 
the expenses of laborers, of land owners, and of capitalists. 
Millions of laborers live at the poverty line, millions of 
others at the minimum standard of living line, another 
group at the minimum of comfort line, and another group 
above the extravagance line. In each successive group are 
laborers whose income, in reference to the preceding group, 
gives them a surplus above the income of the preceding 
group. Hence laborers receiving a surplus above the liv- 
ing wage level enter the group living on the comfort level ; 
and a surplus above the comfort level puts laborers onto 
the extravagance or prosperity level. Because an indi- 
vidual's expenses are low, or his bargaining power through 
a labor union is great, or for other reasons, his wage renders 
him over and above necessary living expense, a surplus. 
It is the same with land owners. Some land entails an ex- 
traordinary high cost of tillage and upkeep so that rent 
is barely enough to meet the cost of maintaining the land 
for productive uses; for such land, there is no surplus in- 
come. It is on the margin where costs equal income. But 
above the base line of this margin exist better grades of 
land, soil that is more fertile, building sites more favor- 
ably situated; real estate whose cost of operation and use 
is low in proportion to income. For such land, rent sup- 
plies over and above the minimum income needed to meet 
costs, a surplus, an excess gain to the owners. In a similar 
manner, the cost of operation of different units of capital 
varies widely. Some shops, factories, railroads and stores 



220 Capital 

can scarcely make ends meet; they are at the margin 
where costs just about eat up income. But above these 
base line business concerns are all sorts of gradations of 
businesses which enjoy advantages, economies and efficien- 
cies such that their costs by no means equal their income. 
Such businesses have a surplus over and above all expenses, 
and over and above the minimum income necessary to meet 
the costs of those low grade businesses at the margin whose 
costs are so great as to consume income entirely. In each 
of the elements of economic organization there is a mini- 
mum payment requisite as an incentive to secure an ade- 
quate amount of that element. But when this minimum 
is paid, there are great numbers of workers, of land owners 
and of capital owners, who, because of superior advantages, 
low costs, unusual economies and efficiencies, realize a 
surplus of great or small size. 

The group of economic concepts involved in the mini- 
mum and surplus are fundamental to any comprehensive 
interpretation of income distribution. Nothing is more es- 
sential than to get away from the assumption that a fixed 
uniformity rigidly prevails in all units of labor, land and 
capital. The economic facts of the case shatter completely 
any such assumption. The actual economic conditions 
consist of gradations and levels of laborers, landlords and 
capitalists, some at the margin of existence, and above them 
many grades and levels of laborers, landlords and capital- 
ists realizing all degrees of surplus. 

The consuming ambition of aU groups is to win as large 
a surplus as possible. The surplus is the source of economic 
fortune, fame and power. In it is wrapped up the source 
of satisfaction for great instincts seeking expression in 
economic achievement. Everywhere men match their wits 
in a stupendous scramble to exact the lion's share of the 
surplus for themselves. In every branch of manufacture, 
transport, agriculture, finance, mining and commerce, all 
parties, laborers, land owners, and capital owners are en- 
deavoring to raise their bargaining power to the maximum 
in order to capture the greatest possible amount of the sur- 
plus. Different parties organize, combine, and plan for 



Capital 221 

the purpose of attaining the strategy and power necessary 
to extract the greatest amount of the surplus. 

The consequence is that the actual shares of the differ- 
ent parties bear no fixed ratio in all industries, or in all 
years alike. On the contrary the ratio of the shares of income 
going to laborers, landlords and capital owners the country 
over varies from year to year and from industry to in- 
dustry. To illustrate, some variations in the distribution 
of shares of income in the national industries of mining, 
manufacturing, railroad and public utility corporations for 
the years between 1913 and 1919 may be taken. The share 
of wages was 63.9 per cent, in 1913, but shrank to 54.3 
per cent, in 1917 and rose to 70.2 per cent, in 1919. More- 
over, in 1919, "interest and dividends together absorbed 
hardly more than half of the share of the product that 
they had in 1913 and 1914." These figures show variations 
in the division of the total national income for the major 
industrial departments of the economic organization.^ 

The variations in the ratio of division as between differ- 
ent lines of industrial pursuits also deserve illustration. 
In 1916, only 40.6 per cent, of gross railroad revenues went 
to labor in the form of wages ; in 1918, 54.06 per cent, went 
to labor and in 1919 and 1920 the percentage was still 
greater. From income statistics for 1917, it is found that 
for railroads the great mass of profit is less than 10 per 
cent, on invested capital; that for banks, the great mass of 
income falls between 10 and 15 per cent, on invested capi- 
tal; that for manufacturing, mining and mercan tiling, the 
main portion of profit ranges from 30 to 50 per cent, on 
invested capital; while for water transportation, the bulk 
of profits was from 75 to 100 per cent, of invested capital. 
The variations between different establishments in a single 
branch of economic life are well illustrated in banking. 
Out of ten large New York City banks in 1919, one earned 
35.8 per cent, on capital and surplus, two others earned 
above 24 per cent., five earned between 18 and 13 per cent. 
and two earned less than 13 per cent. Such variations 
would not only be found among banks in general but also 

1 See David Friday's "Profits, Wages and Prices," pp. 124-132. 



222 Capital 

among the establishments within any other line of economic 
activity. The conclusion is obvious that variation rather 
than uniformity is to be looked for in the division of shares 
of income, whether for all economic activity over a period of 
years, or for groups of industries in any one year, or for 
individual establishments within a single line of industry 
in any one year.^ 

Personal inequalities of income and ownership were com- 
prised in the sixth and seventh classifications of wealth 
statistics. Certain obvious causes of the inequalities of for- 
tune have already been pointed out. The whole concep- 
tion of individualistic property rights has been woven into 
the institution of property in ways which make inequalities 
the natural outcome and the corporate structure of owner- 
ship provides a ready mechanism for the accumulation of 
wealth and income. But there are other factors which en- 
ter directly into the inequalities, and the whole set of causes 
may be considered now in two fundamental groups, — ^first, 
inequalities due to unequal abilities; second, inequalities 
due to unequal privileges. 

Men are born into the world with unequal instinctive 
and mental equipment. Some are dull, unambitious, and 
slow; others are shrewd, aggressive and quick. Success in 
acquiring large income and much property goes to those 
of superior ability, and the successful classes are usually 
thought of as the well-to-do classes. It takes brains to earn 
a million dollars. The wage-earner at the other end of the 
scale has limited imagination, ability, initiative, and sa- 
gacity. He is poorly educated, and in the day's work has 
ambition ground out of him. Only in exceptional instances 
do there appear the men of indomitable instinctive energy 
who by their own merit force their way from nothing to 
riches. But it is this exceptional man whose ability is 
urgently needed for the smooth working of the economic 
organization and whose genius should be encouraged and 
evoked by the property institution. It is natural that when 

1 On this whole matter see David Friday's "Prices, Wages and 
Profits," Chapter III, and Hugh Dalton's "The Inequality of 
Incomes," Chapter X. 



Capital 223 

men of strikingly unequal native ability struggle for the 
same prize, the man of superior ability should win out. The 
freedom and rights of property encourage many men of 
superior gifts to exert their strength to the utmost. The 
rewards are high and success is a sure claim to social dis- 
tinction. 

A feature of this situation which is not often contem- 
plated is the universally accepted conviction that the ability 
of a wage worker can never be great enough to deserve 
more than three or four thousand dollars a year. Superior 
endowment as a machinist, splendid gifts as a worker, the 
finest eye and most skilled hand all reach their limit of 
deserved reward, usually before a $2500 wage is reached, 
certainly before a $5000 figure is reached. No matter how 
great his ability as a laborer, he cannot actually earn be- 
yond certain very narrow limits. It is only ability as a 
manager or director or property owner which earns un- 
limited returns. This social maxim has become so axiomatic 
that it is as natural as the air we breathe. "We think noth- 
ing of it. The financial reward of a million dollar invest- 
ment is not infrequently greater than the financial reward 
of a score of the most competent skilled laborers. The prop- 
erty investment of that amount is entitled to earn any- 
where from 4 per cent, to 4000 per cent., but the finest 
ability of a score of laborers commands no such unlimited 
right of return. This idea is simply a matter of fact 
principle which everyone takes for granted, and it obvi- 
ously plays a part in the inequalities of wealth which pre- 
vail everywhere. Even a second rate managerial ability is 
usually conceived as deserving a higher reward than the 
best type of manual dexterity or workmanship. 

Unskilled Ability Earns Less Income than Skilled 

The ability of women workers earns less than that of 
men. "It is an economic advantage to be born a boy 
rather than a girl. ' ' ^ Ability exercised in certain occu- 
pations brings higher returns than ability exercised in 
others. There are immense variations and many excep- 
1 Cannan, "Wealth," p. 202. 



224 Capital 

tions, but with the general run of incomes, high ability in- 
fluences income upwards, whereas low ability influences 
income downwards. 

These principles apply of course primarily to income 
from work rather than to income from owning. Income 
from investment need not be accompanied by any substan- 
tial exercise of ability or effort on the part of the owner. 
Inequalities of ability are of importance chiefly in their 
effects upon incomes for work and effort. Clever manage- 
ment of property will make it accumulate more rapidly. 
But such managers can be hired at a salary, and their 
salaries are a truer measure of ability than is the property 
income which goes to the owner. 

It should be noted too that these inequalities of ability 
tend to perpetuate themselves. The children of the un- 
skilled laborer inherit a family and social environment which 
tends to hold them to that level. "There are no absolute- 
ly insurmountable barriers preventing those who are born 
into poor surroundings from forcing their way into the 
best paid professions if they have exceptional ability and 
grit, and there is nothing to prevent exceptionally inca- 
pable persons born in good surroundings from falling into 
the lowest class of workers. But all the same, it is, as every 
one knows, a great advantage to the ordinary person in 
the matter of earning his living, to be the child of fairly 
well-to-do parents, and an enormous disadvantage to be 
the child of parents belonging to the poorest class. ' ' ^ 

There is a great reserve fund of ability in the lower- 
paid classes which is never developed. Lack of encourage- 
ment, of education, of opportunity, leaves enormous re- 
sources of ability untapped. The inertia of class habits, 
the barriers of tradition and custom, the difficulties of the 
struggle upward, — all such factors prevent great dormant 
capacities from ever being kindled into irresistible ambi- 

1 Space does not permit a fuller analysis of this very important 
factor in income inequalities. Special references of much value 
will be found in Cannan's "Wealth," particularly Chapter XII, 
and Dalton's "The Inequalities of Income," pp. 239-270; Taussig's 
"Principles of Economics," Chapter 54, Pigou's "Wealth and Wel- 
fare," and "Watkin's "Growth of Large Fortunes." 



Capital 225 

tions to win the highest rewards of economic activity. The 
degree of success achieved by the present economic system 
is largely due to the fact that in spite of all such barriers 
and obstructions the business world does arouse the ener- 
gies and ambitions of enough men of great ability to win 
their way from the bottom to the top so that it constantly 
recruits a reasonable amount of able leadership. 

Inequalities Due to Unequal Privileges 

The chief inequalities of privileges are those arising from 
inheritance, monopoly powers, and unforeseen chance. 

Inheritance is a primary cause of the more extreme ine- 
qualities of income and ownership. Some people at birth 
are heirs to fortunes; others are heirs to nothing at all. 
Enormous estates are handed down from generation to gen- 
eration and perpetuate the chasm between the extremes of 
possessors and non-possessors.^ It has been estimated that 
** four-fifths of the one hundred and fifty or more fortunes 
in the United States having incomes of over $1,000,000 a 
year have been accumulating fop two generations or 
more."^ In England, where the influence of inheritance 
has had a longer time to work itself out, "the number of 
wealthy men at the top is two and a quarter times as great, 
in proportion to population, . . . as in the United 
States." 

At the other end of the scale stands the common worker, 
with practically no belongings except a few articles of 
furniture and some items of clothing. Probably three out 
of five of the children of the country are born into prop- 
ertyless families. Children of these classes inherit only 
bodies and brains to work with capital owned by others. 
Nothing is handed down to them in the form of a com- 
petence to begin life on. They have no assured means of 
livelihood. Their inheritance points to dependence upon 
the real property owners of the community.^ 

This contrast of inheritance has come to have some very 

iSee Cannan's "Wealth," pp. 812-184 and Taussig's "Economics," 
pp. 248-250. 

2 Irving Fisher, American Economic Review, March, 1919, p. 12. 
sHobhouse, "Property, Its Rights and Duties," p. 21. 



226 Capital 

serious results. The man wlio inherits property inherits 
not merely an assured income; he receives the power of 
control over the lives of a group of workers. The mind of 
the worker has come to feel a stinging sense of discourage- 
ment and injustice in the arrangement. He sees many 
people living on inherited fortunes without doing any gen- 
uinely useful work and he sees his own group working hard 
for a living which in comparison is rude and insecure 
From the viewpoint of an outsider, the sense of injustice 
appears well founded. This outside viewpoint is ad- 
mirably stated by Bishop Charles Gore of Oxford, as 
follows : 

' ' The success of civilization for us must be measured not 
by the amount and character of its products or material 
wealth, nor by the degree of well-being which it ren- 
ders possible for a privileged class, but by the degree in 
which it enables all its members to feel that they have the 
chance of making the best of themselves, to feel that an 
adequate measure of free self-realization is granted them. 
On this ground then our civilization is open to the most 
serious indictment. ... In our own civilization we find 
vast masses of men and women who cannot be reasonably 
described as having any adequate measure of property for 
use. They cannot go into life with the security of free 
men. They cannot, within reasonable limits, control their 
own destiny. They cannot realize themselves." 

Out of this situation arises in large measure the discon- 
tent of the common man. Gross inequalities of fortune are 
behind unrest. And the labor movement, the reform move- 
ment, the progressive movement, the movement of all social 
forces is in the nature of an attack upon the extreme in- 
equalities which are perpetuated by the established system 
of inheritance. Persons who acquire fortunes by inheri- 
tance cannot offer the claim that their fortunes are due to 
their own superb abilities. These fortunes were earned by 
the abilities of a generation now dead. The democratic 
challenge in industry directly relates to these unearned and 
undemocratic inequalities of property. Inheritance as a 
part of the institution of property is on the defensive and 



Capital 227 

has to seek grounds to justify itself. The principles of 
inheritance are in a stage of drastic transformation because 
of the social forces of the times. 

This transformation is the more possible because inheri- 
tance is not established as an inherent and inalienable 
right of property. The preponderant judicial opinion 
makes inheritance a custom or tradition of economic soci- 
ety which can be modified and altered whenever social 
needs make new customs and traditions desirable.^ 

The war made so many new large property owners that 
the importance of the situation is greatly enhanced. It 
is estimated from income tax returns that the war lifted 
from twelve to fifteen thousand new members to the mil- 
lionaire class. Some of these accessions to the millionaire 
group were due to the rise of price levels which automatic- 
ally enhanced the price measure of property without actu- 
ally changing the amount of the property itself. The large 
fortunes moreover do not stand still. Through dividends, 
interest and rent they are steadily on the increase. The 
largest amount of saving is done by the largest property 
holders, and these savings mean more investments and 
more income. Their savings are large, not because their 
consumption is small, but because their income is extraor- 
dinary. The inequality thereby mounts higher and higher. 

Whatever may be thought of the ability of the recipients 
of the largest fortunes, at least that ability is great enough 
to retain the fortunes. A recent estimate places the num- 
ber of fortunes between $5,000,000 and $10,000,000, hajid- 
ed down during the present generation at five hundred,^ 
In the original building of the great fortune, a high degree 
of genius and unswerving energy is ordinarily the telling 
factor. Only the man of force of character and consider- 
able, shrewdness can start with little or no means and pull 
himself up to a wealthy position. But once the fortune is 
amassed, and handed down to a succeeding generation, it 
requires only an indifferent ability to hang onto it. As 
G. P. Watkins remarks, "Keeping riches once gained is 

1 Fisher, American Economic Remew, March, 1919, p. 12. 

2 H. H. Klein, "Dynastic America and Those Who Own It," 



228 Capital 

easier than ever before. . . . The rieli by inheritance have 
a position which they can lose only by a destructive ten- 
dency amounting almost to madness. ' '^ The inheritor of a 
fortune who lacks the ability to manage the fortune, or 
who desires not to be bothered with the responsibility, 
can hire a trust company to give expert management of the 
property. So inequality begets greater inequality, and in- 
heritance without severe restriction lies prominently at the 
bottom of the situation.^ 

All of this is not to deny that a substantial amount of 
inheritance is desirable. It is beneficial to the recipient be- 
cause it gives him a superior opportunity at the start of 
life. It makes for the security of himself and his family. 
It is good for society that inheritance within limits should 
be preserved. The entire difficulty springs from immoder- 
ate bequests and the consequent excessive and dangerous in- 
equalities. The social attack upon inheritance is not upon 
inheritance itself, but upon the undue concentration of it. 
The social movement seeks a wider distribution of inheri- 
tance, — more inheritance by the mass of people and less 
inheritance by the concentrated handful. As Taussig is 
careful to remind his readers, "Inheritance, in sum, is 
an indispensable part of the institution of property."^ 

The principles determining the condition by which in- 
heritance shall be placed under social control are chiefly 
psychological. First of all, the limitations on inheritance 
must be high enough to affect favorably the motives of the 
various parties concerned. The inheritance tax must be 
rigid enough so that the people receiving a bequest are not 
thrown on easy street nor given the feeling that they are 
freed from the necessity for making good in individual 
economic service. As Eoss warns, "Not that a son may 
not inherit enough of his father's wealth to live on, but 
that no one may inherit a fortune so large as to kill in 
him all incentive to work and to tempt him into an extrava- 

1 "Growth of Large Fortunes," p. 159. 

2 Dalton, "The Inequality of Incomes," p. 329. 

3 Taussig, "Economics," "p. 251. See also Ely, "Property and Con- 
tract," pp. 425-426. 



Capital 229 

gance of expenditure and conduct which discourages or 
corrupts the useful members of society."^ The inheritance 
taxation must then be severe enough to reduce those glar- 
ing inequalities which give the ordinary man a sinking of 
the heart and a bitter sense of the hopelessness of trying to 
get ahead. This psychological necessity is clearly stated 
in one of Theodore Roosevelt's messages to Congress. 
Roosevelt declared that the reduction of the gross contrasts 
of inherited wealth would ''help to promote a measurable 
equality of opportunity for the people of the generations 
growing to manhood."^ Inheritance taxation should also 
be measured by its effects on the men who have the ability 
to earn great fortunes by strenuous business endeavor. 
The man who makes a large fortune has the opportunity to 
use it in the form of public gifts and benefactions which re- 
flect large personal esteem and prestige upon the donor. 
If the rich man realizes that unless he does make large 
public benefactions, his property will in large measure be 
taken by the State at his death, he is likely to prefer to 
make the benefactions. "With the anticipation that the 
State will take a large share of the property which he does 
not give away before his death, the ordinary man of wealth 
would be induced to take to heart the claim of Andrew 
Carnegie that it is a crime for a man to die rich, and 
that the only human and decent procedure is to bestow the 
fortune for useful social purposes during the owner's life. 
Millionaires might thus be inspired to give parks to cities, 
build art galleries or libraries, endow universities, establish 
foundations for scientific and medical research, provide 
hospitals, subsidize deserving philanthropic causes, etc.^ 
Inheritance taxation should be so regulated as to stimu- 
late favorably the motives of fortune owners to give wisely 
and generously for social purposes ; to stimulate the recip- 
ients of inherited fortunes to work for their own salvation ; 
and to keep alive the hope of economic success among the 
masses. 

1 "Principles of Sociology," p. 385. 

2 Sixtieth Congress, Vol. 42, Part 1, pp. 71-72. 

3 See Carnegie's, "The Gospel of Wealth." 



230 Capital 

Secondly, the converse of this proposition is that the tax- 
ation should not be so great as to cause evil psychological 
effects. If too much of a fortune is taken by the State, 
men will be discouraged from wanting to make money. A 
certain amount of inheritance is useful as an inducement 
or reward for men to throw themselves strenuously into 
business endeavor. The prospect of handing property 
down to their children stimulates men to create a compe- 
tence for themselves and their families. But beyond a 
certain point the family motive is displaced by other mo- 
tives. Irving Fisher found that the business man's accu- 
mulating motives beyond a certain point "were rather 
those of power, of self-expression, of hunting big game." 
Inheritance taxation which would stifle the basic impulses 
of men of great ability in business would defeat its own 
purposes. 

The exact tax rates which strike this psychological bal- 
ance are still a matter of political experiment. In 43 States, 
inheritance taxes of some sort existed in 1917, with rates 
ranging for direct heirs from one to fifteen per cent, and 
for collateral heirs from three to thirty per cent. The 
Federal Government in 1919 had an inheritance tax on 
beneficiaries running from one to twenty-five per cent. 
Most European countries have established substantial in- 
heritance tax rates. The principle is accepted by most ad- 
vanced nations, and may be looked upon as established in 
its fundamental implications. 

Monopoly Privileges a Cause of Inequalities 

Special privileges and monopoly advantages are abun- 
dant in the economic system. Illustrations would include 
avenues for inside information in stock speculation, secret 
knowledge of the sections of future city development as 
a clue to real estate investment, patent rights, franchises to 
railways and other public utilities, power to fix monopoly 
prices, favoritism in the granting of contracts, devices of 
unfair competition, superior possession or monopoly of 
raw materials and other resources, superior bargaining 
power with lesser companies or vsdth labor, tax exemptions, 



Capital 231 

trade-union influences, ete.^ Monopoly privileges may exist 
among labor groups as well as among property groups, and 
often it occurs that a labor monopoly is matched in an 
economic struggle, quietly or openly, with property monop- 
olies. In the general run of cases, these monopoly advan- 
tages tend to further the inequalities of ownership and 
income. 

This analysis does not imply that monopoly advantages 
are indefensible. Most monopoly advantages contain ele- 
ments of real service to society. In many cases, they are 
the creation of men of great genius and ability. A patent 
monopoly, for instance, often arises in this way. A monop- 
oly advantage is not a sign that a man has fallen without 
effort into easy street. The men of towering ability create 
special privileges for their business undertakings where 
such privileges are necessary. There are good and bad 
monopoly advantages, and those which are the result of 
ability and those which are not. The bad privileges are 
almost invariably strong causes of inequalities of fortune, 
and the good privileges in no small measure work to the 
same end, although in the latter eases the inequalities are 
apt to be a reflection of ability that brought substantial 
public good. 

John R. Commons gives evidence to indicate that about 
four-fifths of the millionaire fortunes have been derived 
from permanent monopoly privileges. The largest of these 
fortunes are thought to have benefited most thoroughly by 
special privileges, for it is estimated that ''perhaps ninety- 
five per cent, of the total values represented by these mil- 
lionaire fortunes is due to those investments classed as land 
values and natural monopolies and to competitive indus- 
tries aided by such monopolies." ^ In the building of these 
fortunes, personal ability counted primarily, but personal 
ability consisted of the power to create and the genius to 
use monopoly advantages. It is in this way that monopoly 
advantages foster inequalities of possessions. 

A careful and scientific authority, J. W. Jenks, con- 

1 See G Myers's "History of the Great American Fortunes." 

2 "The Distribution of Wealth," p. 252. 



232 Capital 

clndes a stadv of the Tnnning of great fortimes by a 
STunmary -^Meli is substantially in line '^vith. these opin- 
ions. He says, *"Let me emphasize again what I said be- 
fore, that it is probably in and throngh the exercise of the 
principle of plunder or the undne exercise of advantage, 
of gambling or of its allied principle of monopoly, or of 
special privilege or favor of some kind that many, very 
many, if not most of the greatest f ortones have been "^on. ' '^ 

Unforeseen Chance as a Cause of Inequalities 

Lnek, cirenm stance, an unexpected turn of events, acci- 
dent, and fortuitous change all play an important part in 
the vrinning of large fortunes. '"Tvro men earn equal 
amounts because they are of about equal ability and indus- 
try and -w-ork at the same trade ; they save equal amounts, 
and invest vrith what good authorities would consider equal 
judgment, but the investment of the one turns out for- 
tunate and that of the other unfortunate. The one becomes 
rich and the other remains poor."- Likewise, the varia- 
tions in the price level affect deeply the value of invest- 
ments and the purchasing power of fixed incomes. A 
dollar of permanent investment before the war would in 
post-war prices have a purchasing power of about fifty 
cents. "With a shrinkage of the dollar in a period of infla- 
tion there goes a violent fluctuation in the value of all forms 
of property. A new railroad built through one section of 
a city increases the real estate values of the neighborhood, 
a new law passed by the legislature curbs or releases profit- 
making power, a costly strike or a poor wheat crop swings 
fortunes up or down as the case may be. Perhaps the 
greatest factor of chance is the profit system itself. Profit 
is paid as a reward for risk. The business man takes his 
chances and in recompense receives a profit. The more 
risky the business presumably the higher the profit deserves 
to be. The element of chance is in this way definitely in- 
corporated in the property institution as an indispensable 
element, and one deserving of large rewards. 

- "Great Forttmes, The Winning and Using," p. 41. 
2 Cannan's '"Wealth," p. 187. 



Cap^kd 233 

The greater the risk, the greater the rightfnl profit, and 
in corLseqnence, the greater the inequality of vrealth.. Ob- 
viously if the risks and chances in bnsiness conld be reason- 
ably and substantially reduced, the inequalities of -wealth 
might be reduced accordingly. It has been proposed that 
in important business undertakings the GoTemment might 
nndervrrite the venture, and by a form of public insurance, 
reduce the unnecessary risks and chances. The Govern- 
ment in certain ways has already taken steps in this direc- 
tion. The Federal Reserve System has in a very far reach- 
ing vray reduced risks in the field of banking and credit. 
The Interstate Commerce Commission and Federal legisla- 
tion guaranteeing TniTiiTrm Tn returns to railroads have fun- 
damentally modified the nature of risks in that branch of 
economic enterprise. Outside of government support, the 
principle of insurance has been extended over one risk 
after another in business undertakings. Fire, accident, 
health, and executive or managerial insurance, — ^these rep- 
resent a steady expansion of the insurance principle. 
"Cannot a similar principle be applied to the risk of in- 
dustrial loss? If it were possible to guarantee every 
erdrcpreneur at least his operating expenses, including de- 
preciation, the loss would be minimized.''- The proposal 
is in only a beginning stage, but its fundamental principle 
appears to be essentially sound from an economic point 
of view. If it is worked out practically in the course of 
time, the effect upon the inequalities of wealth would be of 
importance. 

The three main groui>s of causes of inequalities of privi- 
lege, namely, inheritance, monopoly, chance, are not static, 
fixed causes. They are elements in the whole institution 
of property and under the pressure of the dynamic social 
and economic movement of the times, they are open to 
constructive modification. The inequalities of privilege 
and the inequalities of ability stand side by side as the 
great factors in maintaining the inequalities of income and 
ownership. Both unequal ability and unequal privilege 
stand as inseparable parts of the institution of property. 

1 David rriiav. 'PTonts, Wages ard Prices," Chapter XIV. 



234 Capital 

There is no widespread desire to eliminate them. But a 
modification of their essentials so as to secure in the natural 
course of events a wider diffusion of property, and better 
distribution of opportunity for ability to show itself is the 
social demand upon the economic system. 

REFERENCES 

Cannan, E.: Wealth 

PiGOU: Economics of Welfare; Wealth and Welfare 

Dalton, H.: Inequality of Income 

Friday, DAvm: Profits, Wages and Prices 

King, W. I.: Wealth and Income of the People of the United 
States 

Sydenstricker and King: Population and Income, Journal of 
Political Economy, Vol. 29, pp. 571-585 

Gerstenberg, C. W.: Materials of Corporation Finance 

Fisher, I.: Nature of Capital and Income; The Purchasing 
Power of Money, Chapters I-VIII 

Davenport: Value and Distribution; The Economics of Enter- 
prise 

Carnegie, Andrew: The Gospel of Wealth 

Ely, R. T.: Property and Contract in their Relations to the 
Distribution of Wealth 

HoBHOUSE and Others: Property 

Ely and Others: The Foundations of National Prosperity 

HoBSON, J. A.: The Economics of Distribution 

Lyon, W. H.: Capitalization 

Orth: Readings on the Relation of Government to Property 
and Industry 

Groat: Attitude of American Courts in Labor Cases 

Beard, C. A.: An Economic Interpretation of the Constitution 
of the United States; Economic Origins of Jeffersonian De- 
mocracy 

Good now: Social Reform and the Constitution 

Marshall, L. C. : Readings in Industrial Society, Chapter 14 

Taussig: Principles of Economics, Chapter 54 

Hamilton, W. H.: The Price System and Social Policy, Jour- 
nal of Political Economy, Vol. 36, p. 31 

Meade, E. S. : Corporation Finance 

Hobson: Work and Wealth 

Clay, Henry: Economics for the General Reader, Chapters 23-25 

Commons, J. R.: Trade Unionism and Labor Problems, Part 5 

Jenks, J. W.: Great Fortunes 

Simpson, K.: Capitalization and Good- Will; Johns Hopkins 
University Studies, Series XXXIX, No. 1 



Capital 235 

Carver, T. N.: Distribution of Wealth 

King, W. I.: Wealth and Income of the United States 

Federal Commission on Industrial Relations, Vol. I, 1915, Sum- 
mary Report 

Money, L. C: Riches and Poverty 

Friday, David : Journal of Political Economy, Vol. 26, p. 962 ff . 

Cooley: Social Process 

Ritchie, D. G.: Natural Rights 

Pound, Roscoe: Liberty of Contract, Yale Law Journal, Vol. 
18, pp. 454-487 

Watkins, G. p.: The Growth of Large Fortunes 

Fisher, I.: American Economic Review, March, 1919 

Myers, G.: History of the Great American Fortunes 

Clark, J. B.: The Distribution of Wealth 

Dickinson, G. Lowes: Justice and Liberty 

Carver, T. N.: Essays on Social Justice 



CHAPTER VIII 

MANAGEMENT: ITS TECHNIQUE AND RESPONSIBILITIES 

The economies of a previous period classified the factors 
of production under three headings, — land, labor, and capi- 
tal. The economic developments of recent years have 
brought to the front a fourth fundamental factor, manage- 
ment. Management exists primarily for the purpose of 
bringing into balance all of the multitudinous forces which 
play a part in the success or failure of the modern busi- 
ness concern. Management is responsible for bringing effi- 
ciency out of a chaos of scattered elements. Management 
functions by unifying, correlating, organizing and adminis- 
tering the sum total of economic factors which comprise a 
modern business establishment. Land, labor, and capital 
are, none of them, taken singly, capable of complete self- 
management, but they rely upon a body of administrators 
and governors who are especially qualified and competent 
for the managerial supervision of all the activities of the 
business concern. The significance of the modern function 
of management is comprehensively appraised in the follow- 
ing statement by Louis Brandeis: "The coming of the 
science of management, in this century, marks an advance 
comparable only to that made by the coming of the machine 
In the last."i 

Management has been compelled to develop a technology 
of its own in order to cope with the almost infinite interre- 
lations of the present industrial regime. No single human 
mind could master and interpret the great variety of tech- 
nical problems which underlie modern production. The 
efiicient handling of labor on a large scale, the appropria- 
tion of the most recent discoveries in all the physical sci- 
1 "Business a Profession," xlviii, pp. 2-3. 
236 



Management: Its Technique 237 

enees, the utilization of fundamental engineering knowl- 
edge, the co-ordination of all departments of a business, 
the adoption of scientific marketing, the maintenance of 
adequate finances, the adherence to proper legal and social 
requirements, the infusion of morale into the working and 
directing force, — these problems in their entirety would 
baffle the most prodigious and ingenious mind. There is 
one way, and only one way, by which the vast aggregations 
of facts, details and problems which enter into a modern 
business concern can be brought into harmony, and that 
one way is by an application of the methods of science. 

In some cases, large property owners have proved com- 
petent to direct and manage their own properties; in most 
cases, groups of property owners have hired salaried man- 
agers, whose gifts of character especially fitted them 
to perform the functions of management. During the 
last ten years there has developed a marked tendency to 
turn the problems of management over to specially trained 
engineers. It is not enough, in more and more instances 
in modern industry, that a manager should have been born 
with great ability as an organizer, or with a genius for di- 
recting large affairs. It is necessary that a manager should 
be acquainted as an engineer with the technology of man- 
agement, with the body of scientific principles and practices 
which most men of ability can acquire best through a spe- 
cial course of technical training. An observer of the broad 
industrial situation states the tendency in these words, "It 
is becoming each year increasingly evident that a large part 
of the industrial leadership of the country must come from 
such engineer-managers, who have succeeded the old owner- 
managers. . . . Engineer-managers who have combined 
with their knowledge of the material sciences a scientific 
study of human relations are usually superior to other in- 
dustrial managers in their approach."^ 

The problems of management are in great measure a 

reflection of the size of modem business establishments. 

Everybody knows that business combinations and large 

establishments are widespread in the present economic 

1 S. A. Lewisohn, Atlantic Monthly, Vol. 126, pp. 414-418. 



238 Management: Its Technique 

system. This popular impression overlooks, however, the 
important fact that small business establishments are not 
by any means a thing of the past. Statistics for 1914 show 
that in the United States there were in that year no less 
than 140,971 manufacturing establishments which em- 
ployed less than six wage earners each. A manufacturing 
establishment employing not to exceed 100 wage earners 
would not appeal to the average imagination as a large en- 
terprise ; but it needs to be remembered that in 1914 there 
were 262,217 establishments no larger than that. The small 
establishment is not dead and gone. These smaller estab- 
lishments comprise 95 per cent, of all manufacturing con- 
cerns in America. On the other hand, the relatively few 
large establishments represent such vast aggregations of 
manufacturing enterprise that they employ the great bulk 
of the wage earners of the country. The remaining 5 
per cent, of establishments employ fully 65 per cent, of the 
wage earners. Another comparison of figures indicates 
more strikingly the scope of the large business units. The 
1 per cent, of the establishments of the country which are 
the largest employ about the same number of wage earn- 
ers as the 95 per cent, of smallest establishments. More- 
over, over four-fifths of the annual product comes from 
plants which individually turn out each year goods valued 
at more than $100,000. Nearly one-half of the annual 
product comes from plants whose individual turn-out each 
year exceeds a value of $1,000,000. Hence, the great bulk 
of wage earners are employed in establishments which hire 
hundreds or thousands of workers, and the main portion 
of the national product is made in establishments whose 
annual output has to be figured in hundreds of thousands 
or millions of dollars. The little establishments flourish, 
and in total numbers of individual plants show impressive 
figures; but when they are measured by the work which 
they do, by the workers they employ, by the value of their 
output, they recede to a minor part in the productive equip- 
ment of the nation. The major industrial activity of the 
country is the activity of big business, and for a clear con- 
ception of the true state of the economic organization, it is 



Management: Its Technique 239 

imperative that the facts about the relative size of business 
establishments should be kept well in mind.^ 

The main trends toward business concentration have 
been comparatively recent. Industry during the Civil War 
period was characterized by small establishments for the 
most part. Since that time, in thirteen leading lines of in- 
dustry, the number of wage earners in each plant has in- 
creased seven times over, the value of the output of each 
plant nineteen times, and the amount of capital thirty-nine 
times. This industrial evolution in the directiori of con- 
centration began to be conspicuous during the eighties of 
the last century. The trust movement came into notoriety 
during the next decade, and as the trust fell under the 
ban of the law, the late nineties and the first years of the 
new century witnessed the development of holding com- 
panies and consolidations of one sort and another. Com- 
binations came swiftly during periods of prosperity, but 
during years of panic or depression they were rarely 
formed. The great era of consolidation in this country 
was the fifteen years preceding the depression of 1903. 
That depression slowed up the combination movement, and 
from 1903 down to the opening of the European War, 
the business consolidations were less sensational and less 
extensive. The war period gave new impetus to combina- 
tion in many lines. It is essential to remember that the 
business combinations of the present day are the creation 
of the last thirty years of economic history, and that most 
of the fundamental consolidations were pretty definitely 
determined during the first half of that thirty-year 
period.^ 

Classification of Types of Management 

There is no one uniform type of management for all 
establishments. The various sizes and conditions of busi- 

1 See Statistical Abstract of the United States, 1919, pp. 190-195. 

2 See A. Dewing's "Financial Policy of Corporations," IV, 33-41 ; 
Ripley's "Trusts, Pools and Corporations," Introduction; I. Lip- 
pincott's "Economic Development of the United States," Chapter 
XXI; C. E. Van Hise's "Concentration and Control," pp. 35-59; 
J. W. Jenks, "The Trust Problem," Chapter I. 



240 Management: Its Technique 

ness concerns have brought into operation widely varying 
types of management. On broad lines of classification, the 
three outstanding types are the individual, the partnership, 
and the corporation. 

In the individual type, the owner and the manager are 
usually one and the same person. The individual carries 
on the business with his own brains, largely with his own 
money, and upon his own responsibility. For the most 
part, this type of management is suited to relatively small 
enterprises. Agriculture is largely under the individual 
type of management, and a substantial portion of retail 
trade is conducted by individual merchants. But in manu- 
facturing, less than 8 per cent, of the total national product 
is made under the individual type of management. The 
individual managers usually have small plants, and the 
lines of manufacture where the small individual manage- 
ment survives in largest numbers are such as baking, cloth- 
ing, printing, dairy products, blacksmithing, and the like. 
Individual management normally has the advantage of the 
direct, personal, immediate attention of the man whose 
whole fortune is at stake. It rests upon highly commendable 
qualities of character such as thrift, initiative, honesty, re- 
sponsibility, and by providing an opportunity for men to 
make good in business in a small way, it often brings men 
of ability to the attention of larger establishments. Small 
business is in many ways a training ground and a stepping 
stone toward promotions into the more difficult managerial 
positions of larger business units. From an economic 
point of view, it is of the utmost importance that the big 
business concern should not develop in such a fashion as to 
block the way for men who desire to set up businesses of 
their own. The hundreds of thousands of small individual 
managers deserve as much freedom of opportunity to make 
good as can possibly be given them, and the practices of 
big concerns cannot be allowed to choke out reasonable op- 
portunities for small ones to get ahead by efficiency, fore- 
sight, and good judgment.^ The small business man in his 
individual plant has a part to play in economic life which, 
1 See Woodrow Wilson, "The New Freedom." 



Management: Its Technique 241 

in its own way, is just as important as the part played 
by larger types of management. 

In the partnership type, two or more individuals unite 
their capital or their ability, or both, and overcome some 
of the fundamental limitations of individual management. 
As business becomes complicated, the single individual is 
apt to find the problems too great to be solved effectively 
by one mind, and management may often be made more 
effective by combining the ability and judgment of differ- 
ent men. At the same time, the single individual is likely 
to reach a point where his individual capital is inadequate 
to finance the business, and the associated capital of part- 
ners aids in solving the problem. The ordinary partner- 
ship stands in the eyes of the common law as a financial 
unit. A contract by one of the partners binds all, and in 
case of insolvency each partner is liable, not merely to 
tie amount which he invested in the business, but to the 
full amount of his total property. Partnerships appear 
to be diminishing in importance relative to other types of 
management. Their chief field is moderate sized mercan- 
tile and manufacturing enterprises, and the legal and other 
professions. In 1900, partnerships produced 19 per cent. 
of the total value of all products, but in 1914 the share of 
the total produced by partnerships had shrunk to 8.8 per 
cent. As in the case of individual management, so in 
the case of partnerships, their function is important even 
though overshadowed by other types of management, and 
a fair and open field for the partnership, wherever it 
manifests the qualities of economic efficiency, is thoroughly 
desirable. 

The paramount type of economic management is the 
corporation. By the statistics of 1914, corporations pro- 
duce 83.2 per cent, of the total national product. A corpora- 
tion comes into being by a special charter granted by a 
state. Some of the chief characteristics of the corporation 
are as follows: (1) the joint stock principle of ownership, 
under which a scattered number of individuals may invest 
their money in a unit business undertaking; (2) central- 
ized management of the capital owned by the scattered in- 



242 Management: Its Technique 

vestors, under conditions which tend to bring about reason- 
able efficiency and proper security; (3) continuity of exist- 
ence, since if one corporation official resigns or dies, a suc- 
cessor is promptly chosen, while the life of the corporation 
goes on unbroken; (4) limited liability of the owners of 
the corporation capital, in that each investor is liable, in 
case of insolvency of the corporation, only to the amount 
of his individual investment; (5) a distinctly corporate 
identity, in that the corporation acts as a legal person, as 
a business unit, as an entity separate from its constituent 
investors and directors. 

The corporate type of management is the effort of busi- 
ness judgment to cope with the problems of direction and 
control of an economic system constructed upon a founda- 
tion of machinery, natural power, and applied science. 
Individuals found the task of owning the large blocks of 
mechanical equipment necessary in a modern factory, and 
the task of supplying adequate financial resources, too great 
for the shoulders of single business men. It became neces- 
sary to assemble the savings of many individuals, to bring 
their money together for a concentrated investment. The 
savings of armies of small investors could be heaped to- 
gether, and used to supply the capital for large business 
undertakings. The corporation supplied a large scale sys- 
tem of management simultaneously with the large scale 
production of wealth under the regime of machinery and 
science. 

As business combinations became greater and greater, sev- 
eral adaptations of the corporation principle seemed neces- 
sary to business men. One of the earliest of these was the 
pooling agreement. Pools are agreements between business 
concerns, whether corporations or otherwise, to follow some 
concerted policy of price fixation, or of limitation of out- 
put, or of consolidation and pro rata sharing of profits, or 
of division of territory between companies. The agree- 
ments could not be enforced by law, and hence were very 
unstable since any member of the pool could withdraw 
whenever he considered it for his best interests to do so. 
Pools were of questionable legality, and usually had to be 



Management: Its Technique 243 

operated secretly. During the eighties, 'corporations took 
up with the principle of the trust as a more stable and 
solid means of combination. Under the trust, the stock- 
holders of each company turned their stock over to a small 
board of trustees, who were empowered to direct the affairs 
of the group of companies. Stockholders received in ex- 
change for their shares of stock, trustees' certificates, on 
which they drew dividends virtually equivalent to the divi- 
dends on the former shares of stock. This centralized the 
management of the constituent corporations effectively, but 
when the trust method came up for the consideration of 
the courts, it was declared illegal, and gradually had to be 
abandoned by the bulk of corporations. 

Business men then looked around for some method of 
combination among corporations which would stand the 
analysis of the courts and be within the law, but which 
would secure the advantages of combination of manage- 
ment. In some cases, communities of interest were formed, 
under which business men bought up controlling interests 
in the corporations which they desired to direct, and with- 
out any formal organization worked in unison in the man- 
agement of the various companies. This form of centrali- 
zation was at best somewhat loose and intangible, and many 
corporations found it more desirable to combine by creat- 
ing holding companies. A holding company was a new and 
distinct corporation, whose purpose was to own at least a 
majority interest in a group of corporations which it de- 
sired to control. The holding company, by its controlling 
stock ownership, could elect the Boards of Directors of the 
constituent companies, and definitely, tangibly and decis- 
ively centralize the management of the entire organization. 
Each member corporation could retain its subsidiary exist- 
ence, and have its separate Board of Directors, and its own 
executive staff, but they in turn would be elected, and 
governed in their general policies, by the official powers 
of the' central holding corporation. The United States 
Steel Company is the largest example in American industry 
of the holding company, and by the decision of the United 
States Supreme Court on March 1st, 1920, this company 



244 Management: Its Technique 

was declared legal, on the ground that "the law does 
not make mere size an offense." If a holding company 
used its size and power to restrain trade unreasonably 
or to exert undue monopoly influences, it would then be- 
come illegal. Some business men have preferred, in place 
of such a form of combination, a form by which outright 
amalgamation could take place. By amalgamation, a new 
corporation is formed to buy openly and fully a group 
of companies. The old corporations lose their former iden- 
tity, and are completely consolidated, in ownership and 
management, in the new corporation. Closely similar to 
the amalgamation is the merger. Under the merger, one 
corporation already in existence buys up one or more other 
corporations and assimilates the outsiders into its own 
organization. The corporation which undertakes the mer- 
ger simply stows away inside itself some separate corpora- 
tions, and all are merged into a consolidated ownership 
and management. 

The cardinal economic significance of the variety of 
forms of corporate combination is that the modern produc- 
tion process has set up forces which demand a high degree 
of concentration in the control of economic activity. The 
men of business genius who built the great corporations 
found themselves face to face with the need for an adapta- 
tion of the corporation principle on a yet larger scale to the 
demands of modern industry. They experimented with va- 
rious devices of combination, and by methods of trial and 
error, adjusting themselves to business legislation and court 
decisions, they endeavored to solve the economic problems 
which confronted them. The forces of economic evolution 
moved in the direction of concentration of ownership and 
management, and all of the types of corporate combination 
were illustrations of the efforts of the creative imagination 
of business leaders to cope with the economic conditions of 
their generation. 

The Mechanism of Corporation Management 

The corporation has developed a mechanism of manage- 
ment which in its fundamentals is fairly uniform through- 



Management: Its Technique 245 

out corporate industry. In its simplest elements, this 
mechanism involves a mass of stock owners, who elect a 
board of directors, who in turn give some attention to the 
broad policies of the corporation, particularly the financial 
policies, and who delegate the active management of the 
corporation to a group of appointed executive officials. 
These executive officials, in their turn, choose departmental 
and bureau chiefs, superintendents, bosses, foremen, and 
laborers, and have charge of the operation of the business. 
This general set of relations undergoes drastic modifica- 
tions in the actual conduct of corporate affairs, and it is 
necessary to study the strategies and peculiarities which 
have penetrated the institution of corporate management in 
actual practice in order to have a realistic understanding 
of the situation. 

The body of stockholders exert very little authority in 
choosing the Board of Directors. They have the right to 
vote, but as the day for voting approaches, the stock- 
holders receive a legal form to be signed and returned to 
some one actively interested in guiding the election. This 
legal form is a proxy, giving to the actively interested 
party the right to cast the votes belonging to the individual 
shareholder in any way that may be desired. The full 
bearing of this practice is well indicated in an examination 
made by the Federal Commission on Industrial Relations 
of a corporation lawyer of wide experience, Samuel Unter- 
meyer. Mr. Untermeyer stated, "Stockholders do not get 
a 'look in' — the scattered stockholders — as a result of the 
system. What is tEe system? The management send out 
proxies every year, and the proxy is a power of attorney 
to some one they name. If you are a stockholder, you do 
not know to whom you are giving your proxy. It does 
not usually run to the man in control, but to some one 
nominated by him. You do not know for whom he is 
going to vote as a director. You send a power of attorney 
for him to vote for whoever he pleases." Question: "Is 
it not a fact that the proxy system has become so universal 
that every country bank or every country corporation 
almost, large and small, when giving a notice of stock- 



246 Management: Its Technique 

holders' meeting, sends attached, and usually a part of 
the sheet as a notice of that meeting, a proxy ? ' ' 

Mr. Untermeyer : * ' That is the custom now with notices 
of meeting, the proxy generally goes out."^ 

This system of proxies gives the real authority in manage- 
ment to inside parties who desire to maintain control of 
the policies of the corporation. If the inside parties are 
men of fine integrity and a high sense of responsibility, 
all goes well, but if they are not, the corporation is open to 
speculative interests, and all kinds of abusive policies. 
This situation is due originally to the natural inertia of 
the mass of stockholders. As was explained by a promi- 
nent banker and director of a number of large corporations, 
Mr. Jacob H. Schiff, "I believe that the weakness of the 
whole system is the human weakness, that stockholders, as 
long as things go right, do not pay any attention to the 
management of their property, and that only when things 
go wrong they come to realize that they are stockholders, 
and that they should not have permitted their property to 
be controlled by those who have wrongly or badly managed 
it." 

It is because of this inertia of the stockholders that it is 
possible for small minority holdings of stock to dominate 
the policy of the whole corporation. This fact is expressed 
by Justice of the Supreme Court, Louis Brandeis, as fol- 
lows : " As a matter of fact, most stockholders do have very 
little to do with the management, and in these great cor- 
porations they have practically nothing to do. ... I 
think it is true not only of these very large corporations, 
but of very much smaller corporations in which the stock 
is listed and widely distributed, that not only a small per- 
centage of the stock may give control, but that for a long 
series of years control is held sometimes without the owner- 
ship of any stock whatsoever, or of practically no more 
stock than is necessary to qualify directors. Such a wide 
distribution of the stock dissipates altogether the respon- 
sibility of stockholders, particularly of those with 5 shares, 
10 shares, 15 shares, or 50 shares. They recognize that they 

1 "Report of Federal Commission on Industrial Relations," 1915, 
Vol. 8, pp. 7438, 7466. 



Management: Its Technique %^, 

have no influence in a corporation of hundreds of millions 
of dollars capital. By the distribution of nominal control 
among ten thousand or a thousand or a hundred thousand 
stockholders, there is developed a sense of absolute irre- 
sponsibility on the part of the person who holds that stock. ' '^ 
And Mr. Untermeyer, on the same subject, states, "Nearly 
every railroad corporation in this country is controlled 
with less than 10 per cent, of the stock in the hands of all 
the officers and the board of directors put together."^ 

What, then, is the background, experience, and outlook of 
men who commonly hold positions on the boards of directors 
of large corporations? Broadly speaking, they are men 
who are intensively acquainted with questions of finance, of 
investment, of credit, of banking and the like, but not men 
w'ho are familiar with the technology of production, or with 
the deep problems of labor administration. The board of 
directors meets as a whole only a few times during the year, 
but it appoints an executive committee to meet oftener, and 
to decide questions which do not demand the attention of 
the whole board. This executive committee is apt to be 
primarily a finance committee. As stated by John D. Rocke- 
feller, Jr., ''The directors attend principally to the financial 
affairs of the corporation, leaving the actual conduct of 
operations to the officers. ... It is not customary to sub- 
mit labor policies to a board of directors for action. Con- 
ference regarding them is often had with the directors or 
executive committee at the instance of the officers, and 
suggestions are made to the latter by both these bodies."^ 
Roger "W. Babson explains, in lengthy testimony, that 
"the financial interests have nothing against labor. . . . 
But it is indifference with them. Their job is to get 
dividends . . . when they have earned dividends, they 
consider their work is done."* Mr. August Belmont, from 
active experience on many boards of directors, declares, 
"A director rarely has to do with labor matters in a 
corporation unless by chance they are brought to his at- 

1 "Federal Commission on Industrial Relations," Vol. 8, pp. 
7660-7661. 

2 lUd., p. 7438. 3 md., p. 7764. 4 md., p. 7455. 



248 Management: Its Technique 

tention for the purpose of a decision as to the merits of 
something that may bring about a strike or something as 
serious as that." And in regard to making inquiries in a 
given corporation about wages, hours, unions, and working 
conditions, he explains, '*As chairman of the board, that 
is not part of my duty."^ 

Likewise, matters of technology of production, transpor- 
tation, or processes of manufacture are foreign to the atten- 
tion of the average director. This separation of functions 
is candidly stated by Daniel Guggenheim, a corporation 
figure acquainted with the practices of typical corporations 
from experience and first-hand observation: "Our busi- 
ness as regards directors, is somewhat different from al- 
most all other industrial corporations in this regard: Of 
the many directors — ^we have over 20 — ^with the exception 
of two or three they are all men familiar with the business, 
having been brought up in the business, and are technical 
and practical smelting men."^ This distribution of duties 
and functions is fundamental in an understanding of cor- 
poration management. It was the testimony of experienced 
directors of corporations before the Industrial Commission 
that most directors confine their attention to questions of 
dividends, credit, and finance, and this can be done from 
offices in the big financial centers of the country. It is 
for this reason that they are so often termed "absentee 
directors."^ This division of functions has the advantage 
of keeping production and labor matters in the hands of the 
officers on the ground, but this very factor may, and often 
does prove a disadvantage, when the officers in charge at any 
plant, hold reactionary views about labor, and are stolidly 
ultra-conservative in treating fundamental production 
problems.^ 

The real center of control is often hard to find. It is 
not located in the hands of the scattered majority of stock- 
holders; it is not evenly distributed among the several 

1 "Federal Commission on Industrial Eelations," Vol. 8, pp. 7547- 
7551. 
ilUd., p. 7561. 

3 See testimony of Jacob Sehiff, ihid., VoL 8, p. 7523. 

4 On this whole subject see also pages 208-215 of this volume. 



Management: Its Technique 249 

directors. Usually there is some dominating interest which 
openly or quietly exerts the overshadowing influence in thj 
affairs of the corporation. But in not a few cases, a search 
to locate the real power in the affairs of the corporation 
would lead the inquirer to conclude that the real governors 
of the corporation are undiscoverable. Some of the difficul- 
ties of finding the real center of power will become appar- 
ent from a review of certain basic factors connected with 
the organization of corporation finance. The bondholders of 
the corporation have no right to vote for directors. They 
are looked upon as having made a loan to the corporation, 
and in their status as creditors, they have no right to a voice 
in managing its affairs. With railroads, and some of the 
more conservative industrial corporations, bond issues may 
make up a large part, in many cases, the greater part of the 
total financial resources. During recent years, corporations 
have frequently denied voting powers to the preferred 
stockholders, thus putting them on essentially the same 
footing as the bond creditors. Voting power is reserved 
for the holders of common stock, and when it is remembered 
that this represents usually good will, patents, and intan- 
gible assets generally, it will be obvious that the power 
centers in the holders of a controlling fraction of the com- 
mon stock. The owners of the factory, of the machinery, 
of the equipment, of the raw material, and of tangible prop- 
erty generally are the bondholders and the preferred share- 
holders, but these owners of the real property of the corpora- 
tion, in an increasing number of cases, have no voting 
powers. Voting powers are reserved for those who own 
that part of the capital securities which represent the esti- 
mated value of trade marks, of patents, of monopoly ad- 
vantages, and of good will generally. To see the full effect 
of this device, it is necessary to observe that at the time 
of the promotion and formation of the corporation, it is 
usual for the banker and promoter to award themselves 
a substantial block of common stock as a bonus or remunera- 
tion for their services in setting up the corporation as a 
going concern. By retaining this common stock, and con- 
fining the voting power to the common stock only, they 



250 Management: Its Technique 

can readily retain control of the business indefinitely. In 
many instances, the voting power is given to both the pre- 
ferred and common share holders, but the amount of com- 
mon stock issued by the corporation is so large in proportion 
to the preferred issue that the common retains control of the 
business.^ 

Another factor in the control of corporate policy is found 
in the system of reorganizing companies which go through 
receivership and insolvency. It is estimated that more than 
one-half of the railroads of this country have at one time 
and another passed through the hands of receivers, and a 
remarkably large number of industrial corporations have 
travelled the same course. Under a receivership, a bank 
is called in to rehabilitate the finances of the corporation, 
and commonly a voting trust is established. Under the 
voting trust, the stockholders of the insolvent corporation 
assign to a committee of trustees the power to direct the 
affairs of the corporation, at least until such time as it shall 
again be on an efficient basis. This committee of trustees 
is under the control of the bankers who are reconstructing 
the finances of the corporation. When the voting trust ex- 
pires, it is natural for the bankers to desire to perpetuate 
the solvency of the corporation and to make certain that 
its affairs are not conducted again in such a way as to re- 
peat the bankruptcy. The only way of accomplishing this 
is to hold an influence over the board of directors of the 
revived corporation. It will be clear, therefore, that both 
as a result of the influence of bankers in starting a corpora- 
tion when it is first promoted, and as a result of their inter- 
est in perpetuating their influence following receivership 
and reorganization, the bankers tend to acquire a large con- 
trol in the affairs of the average corporation.^ 

More than this, corporations deliberately seek for promi- 
nent bankers to appoint to their boards of directors. The 
board needs the prestige which the names of the distin- 

1 See A. Dewing's "Financial Policy of Corporations," Volume II, 
p. 47. 

2 On this matter, see the testimony of Samuel Untermyer and of 
Jacob H. Schiff, "Federal Commission on Industrial Relations," 
Volume 8. 



Management: Its Technique 251 

guished bankers can quickly give, and many of the direc- 
torate positions of bankers exist primarily for the publicity 
value "which they carry. Again, it is important that a cor- 
poration should be in a position to secure at all times 
adequate credit to carry on its business, and banks which 
have representation on the board of directors are supposedly 
more ready to extend credit to the corporation. Moreover, 
in the very nature of corporation finance, the stocks or 
bonds of the corporation are frequently needed as a col- 
lateral security for loans made from the banks. The stocks 
lose their value for security purposes unless dividends are 
kept up. The stock market insists that dividends be forth- 
coming, and the bankers who are in charge of finances are 
responsible for the maintenance of dividends. For all these 
reasons, bankers attain to a pre-eminent position of control 
or influence in great numbers of corporations. 

The board of directors is likely, therefore, to contain peo- 
ple who are there simply for good looks' sake as well as 
those who are there to assert power. Boards of directors 
contain figureheads, dummies, puppets, and fashion plates, 
and they know their bosses, their inside interests, their lines 
of pull. Here and there is a dominating personality. The 
government of a corporation is not essentially different from 
the government of a political state. There is what Elihu 
Root has called "the invisible government" in politics, and 
the same thing exists in business, "What part of the govern- 
ment of the corporation is visible and what part invisible 
will vary from company to company, and the invisible gov- 
ernment may be just as efficient, and as honorable as the 
visible. It is true as a general rule, however, that human 
nature runs to questionable policies more easily under con- 
ditions of secrecy than under conditions of publicity, and 
this human tendency underlies much of the speculative 
abuses, and corporation wrongs which have been the theme 
of muckraking. All of these considerations serve to explain 
why so many corporations achieve a high reputation for 
safety of invested capital and for financial efficiency, and 
why certain other corporations find it possible to abuse their 
opportunities. 



252 Management: Its Technique 

The mechanism of management below the board of direct- 
ors presents new aspects. The board appoints a president 
and certain major executive officials, who in turn choose the 
requisite subordinates and assistants. The president is the 
great co-ordinator of factors in the business organization, 
and the main point of contact between the business plant 
and the board of directors. There are certain basic manage- 
rial functions which have to be systematized and organized 
in any business, but the methods of organization are by no 
means uniform. The basic functions of any active business 
center around production, finance, accounting and sales, 
and these functions require on the executive staff a pro- 
duction manager, a treasurer, a comptroller, and a sales- 
manager. 

The methods of delegating responsibility, of dividing 
and subdividing functions, and of fixing authority em- 
body many variations and adaptations. Until recently, 
the prevailing method was the "line" or ''military" sys- 
tem of organization. Under this system, business was 
organized on the basis characteristic of former armies. 
Each official was in charge of every detail within a certain 
jurisdiction, and he was obliged to be familiar with all de- 
tails, and to settle all problems. The foremen and the 
managers had to be all-around men, and when business 
grew, and the technology of production, sales, finance and 
accounting become so immense and so intricate, no one man 
was capable of mastering all of the details and settling all 
the problems in his branch of the plant. Feeling a need for 
expert aid, managers developed a line and staff organiza- 
tion, under which the superintendents and foremen drew 
advice and guidance from special staffs of engineers, 
chemists, accountants, and experts of every description. 
Authority, responsibility and function were still, however, 
generalized and broad. A further development has been 
the departmental type of organization, under which special- 
ized functions are grouped and separate foremen are placed 
in charge of each type of function. This is a step in the 
direction of outright functional management under which 
specialization is carried to an extreme. For example, a 



Management: Its Technique 253 

repair boss has charge of all repair work, a route clerk 
has charge of all planning, a speed boss is responsible 
for getting the work completed on schedule time, and so 
on. Most modern businesses conducted on a large scale 
combine features of different types of organization in an 
attempt to adapt the desirable qualities of each to their 
peculiar and particular problems. Large scale production, 
with its increase of technical complications and intricacies, 
has led to greater specialization of workmen, foremen and 
higher officials, and this intensive specialization of func- 
tions is one of the most important developments in the 
methods of the internal organization and administration 
of modern business. 

Technique of Executive Direction 

The chief executives of corporation management would 
obviously have found the direction of large corporations a 
mental and physical impossibility unless they could have 
developed in the meantime a technique for collecting facts, 
interpreting them, formulating policies and executing them. 
Of course, the methods of internal organization which have 
just been described were a part of this new technique. But 
the individual executive had to have at his disposal a tech- 
nique which would enable him to bring the immense de- 
tail of the gigantic business within the scope of his mind, 
in such a shape that he could think intelligently about the 
problems to be solved. 

An important part of this technique lies in the science 
of accountancy. Accountancy transforms all economic fac- 
tors into the common measuring rod of money, and by 
means of this common and universal yardstick, develops 
systematized records which serve as the basis for nearly 
all important business judgments. Accountancy trans- 
lates all of the assets, multitudinous in their variety, into 
a grand total of dollars and cents ; and all of the liabilities 
likewise into a grand total of dollars and cents. This gives 
a photograph of the net worth of the corporation, and is 
an essential feature of virtually all negotiations for invest- 
ment or commercial credit from banks. Accountancy also 



254 Management: Its Technique 

translates all elements of the conduct of the business into 
terms of money expense and money income for a week, a 
month or a year, and supplies thereby a profit and loss 
record which enables executives to determine readily 
whether the corporation is making profits or running be- 
hind. These records form the basis for the corporation 
policy in declaring dividends, surplus profits, and the dis- 
position of the corporation's net income. The accountancy 
of costs furnishes the executive with the pecuniary facts 
bearing on the cost of each unit of production; it appor- 
tions the relative fractions of cost due to labor, to rent, to 
raw material, to depreciation of machinery and equipment, 
and to every factor which enters into the business process. 
Cost figures are indispensable in the estimation of selling 
prices, for otherwise the corporation may find to its sorrow 
that its prices are below expenses of doing business. The 
extreme importance of cost accounts has led the trade 
associations which now exist in the great majority of busi- 
ness lines, to encourage uniform systems of cost accounting 
among their members. Uniform cost accounting tends to 
stabilize prices, and to alleviate the evils of cut-throat com- 
petition. Exact cost accounts make possible intelligent 
comparisons between different parts of a single corpora- 
tion's operations, and between the operations of different 
corporations. They form a basis for discovery of the effi- 
cient and inefficient parts of a business, and a necessary 
guide in formulating policies for the cheapening of the 
costs of doing business.^ The data of accounting are pri- 
mary necessities iri the directive thinking of executives. 

A facility for collecting the proper facts and for digest- 
ing the records presented by accountants characterizes 
great executive ability in the modern large corporation. 
"With the facts in mind, the executive devotes the major 
part of his mental effort to the formulation of the broad 
problems of business policy. He is successful to the extent 
that he can place minor problems on the backs of minor 

iSee A. Marshall's "Industry and Trade," pp. 366-371, also 
Gerstenberg's "Principles of Business," Chapters XXIX, XXX, and 
XXXI. 



Manageinent: Its Technique 255 

officials, keep routine duties in the hands of assistants, 
maintain adequate sources of information, and free him- 
self for concentration upon the essential, fundamental 
issues of the business. Co-ordinate with this executive 
trait is the ability to preserve throughout the channels of 
subordinate administration a fluency and openness such 
that his decisions, his personality, the force of his mind and 
character shall penetrate to the very perimeter of the busi- 
ness. The whole structure of management must serve as 
a conductor for both the technical decision and the human 
spirit of the man at the top. Studies that have been made 
of the dominant powers, traits and habits of the greatest 
modern business executives indicate that the executive 
ability to direct the largest corporate activities involves 
great physical vitality, unflagging mental activity, superior 
judgment in the selection and placing of men, the inspir- 
ing personality of marked leadership, fearlessness in the 
face of huge risks, accuracy in forecasting the business 
conditions of the future, and a genuine statesmanship in 
making all things fall into their proper places, and all parts 
of the business fit into the economic and social structure 
harmoniously. After all is said and done, the technique 
of administration, and the science of facts and policies, is 
just about what the psychology of the chief executive makes 
of it all. His dominating motives, his paramount instincts, 
his emotional peculiarities, his level and type of intelli- 
gence, and the whole human force of his original nature 
will adapt managerial technique in countless ways.^ 

Such a description presents management in its most 
laudatory phases. It is true to the facts of the case in 
a great number of instances, but it is not the whole of the 
picture. For with all of the developments in the technique 
of administration, with the aid of modern accountancy and 
the use of modern statistics, with the experience of success- 
ful executives to draw upon and with the principles of ef- 
ficient business government carefully worked out, it never- 
theless remains a startling fact that most production en- 

1 See, for instance, B. C. Forbes's "Men Who Are Making America," 
and J. G. Frederick, "Business Research and Statistics. 



256 Management: Its Technique 

gineers, consulting engineers, experts in the science of 
management, and trained scientific managers agree that the 
bulk of business to-day is grossly inefficient. This con- 
viction appears to be held by the conservative, sober 
minded, reliable engineers of the country. In their judg- 
ment, the average business would be able to increase its ef- 
ficiency by from 25 to 50 per cent, by the application of 
known and tried principles and practices of management. 
Industry abounds with immense wastes and losses and un- 
realized efficiency because of the unwillingness of managers 
to abandon traditional methods of management, and be- 
cause of their frequent inability to adapt their own psychol- 
ogy to the necessities of modern managerial technique.^ 

The most authoritative single statement of the facts 
about the inefficiencies of many parts of business manage- 
ment is contained in a report presented in 1921 by a Com- 
mittee on the Elimination of Waste representing the Fed- 
erated American Engineering Societies. The committee 
was appointed under the direction of Herbert Hoover, and 
its investigations were conducted by the aid of a staff 
of fifty engineers. Their investigations covered directly 
1125 separate plants, divided between the building industry, 
men's ready made clothing manufacturing, boot and shoe 
manufacturing, printing, the metal trades, and textile 
manufacturing. Four basic causes of waste and ineffi- 
ciency were found: 

"1. Low production caused by faulty management of 
materials, plant, equipment and men; 

"2. Interrupted production caused by idle men, idle ma- 
terials, idle plants, idle equipment; I 

"3. Restricted production caused by management or 
labor ; 

*'4. Lost production caused by ill health, physical de- 
fects and industrial accidents." 

In the judgment of the committee, the waste and inef- 
ficiency is due overwhelmingly to the shortcomings of 

iSee B, C. Thompson, "Scientific Management;" H. L, Gantt, 
"Organizing for Work;" Emerson, "Principles of Efficiency;" F. W. 
Taylor, "Principles of Scientific Management." 



Management: Its Technique 257 

management. These shortcomings mainly take the form of 
a failure to utilize and apply tried and proven principles 
of administration and technique of management already in 
existence. The conservatism and inertia of management 
are primary causes. The body of scientific principles al- 
ready successfully applied in pioneer and progressive 
plants are available but unused. Some indication of the 
extent of loss and waste from managerial inefficiency is 
given by the following detailed findings of the committee : 
Faulty planning of material caused labor engaged in shoe 
production to be idle more than 35 per cent, of the time. 
Faulty planning of work by management caused a loss of 
one-third during the normal operation of clothing fac- 
tories. Proper organization of the men 's ready-made cloth- 
ing industry should bring ''an increase of 40 per cent, in 
effectiveness." In the printing plants of New York City, 
less than one-fifth of the plants had any system of cost ac- 
counting; the other four-fifths lost money during 1919. 
The metal trades were operating at about 60 per cent, of 
normal output, and the value of their increased possible 
production in normal times would, according to the esti- 
mate, exceed half a billion dollars. Labor turnover was 
found to be needlessly high, and few factories were taking 
advantage of any personnel system to reduce the conse- 
quent loss. The manufacturing equipment in clothing, 
printing, and shoe manufacturing is about double the real 
needs of the country in those lines of production. Sea- 
sonal employment means that in clothing manufacturing, 
the worker is idle about 31 per cent, of the year, in shoe 
making, 35 per cent., in building trades 37 per cent. The 
above are only a few typical illustrations, but they serve 
to indicate the enormous waste in economic organization 
due mainly to the failure of a large proportion of manage- 
ment to accept and apply the developments in modern 
technology of production and in the science of human ad- 
ministration. 

Management is, therefore, neither always efficient nor 
always wasteful. The progressive, scientific management 
at its best is a marvel of economy, harmony, and efficiency ; 



258 Management: Its Technique 

but the traditional unscientific management whieli still 
has a strong grip on wide stretches of industry is far from 
efficient. The directions of evolution are decidedly toward 
the adoption of the improved and modern methods of pro- 
duction efficiency. At times the progress made by the bulk 
of managers is tediously gradual, but the important feature 
of the situation is the fact that a body of scientific prin- 
ciples of efficiency is already in existence, that the condi- 
tions of inefficiency are known and revealed, and that 
organized effort is being made to bring all management up 
to the better standards. 

Business Combination and Concentration of 
Management 

The proportions of the task of modern management are 
augmented by the very fact of the concentration of busi- 
ness through corporations, holding companies, trusts, 
mergers, and amalgamations. The extent 6f the combina- 
tion movement was explained in some detail at the be- 
ginning of this chapter. The present analysis has to do 
with the reasons for the combination movement, the results 
of it, and its fundamental implications for the economic 
and social system. 

Reasons for the Combination Movement 

The paramount force in breaking the bonds of inertia, 
and driving business organization out upon the untried and 
adventuresome paths of combination was the menace of cut- 
throat competition. Toward the latter part of the nine- 
teenth century, the adage that competition is the life of 
trade lost its meaning in a great many branches of business, 
and it was discovered that competition carried to an ex- 
treme was the death of trade. Corporations engaged in 
desperate price wars in the determination to take trade away 
from each other, with the result that an appalling number 
of failures occurred. In the sugar industry, out of a total 
of 40 large competing refineries, 18 went into bankruptcy 
in the three-year period from 1885 to 1887. The inves- 
tigation of the general movement toward combination in 



Management: Its Technique 259 

American industry by a Federal Industrial Commission in 
1900 led to the conclusion that "among the causes which 
have led to the formation of industrial combinations, . . . 
competition, so common, so vigorous, that nearly all com- 
peting establishments were destroyed, was to be given 
first place." Even where competition did not have so 
destructive a consequence, it usually forced drastic reduc- 
tions in profits, and raised the hazards of business to the 
maximum. The compelling, dynamic force behind the 
combination movement was the menace of a competition 
"which threatened ruin to hundreds of business corpora- 
tions. Combination was a life-saving endeavor. It was not 
entered into to satisfy the ambitions of idle dreamers, nor 
would it have been undertaken on so vast a scale merely 
in the hope of realizing superior gains. The "driving 
forces" which budged things, and put the original vitality 
into the combination movement were the dangers of de- 
structive, cutthroat competition. Combination was the 
only available means of self-preservation on a safe and 
profitable footing.^ 

When the minds of the leading business organizers be- 
gan to take account of the details of the situation, it ap- 
peared to them that combination would not merely perform 
the life-saving function, but would in addition give to the 
business organizations distinct advantages in production 
and trade which would be measured by an imposing increase 
in profits and dividends. The suppression of damaging 
competition, and the creation of the economies and advan- 
tages of large scale management were the two prime influ- 
ences behind the combination movement. Comjbination 
was looked upon as a course of action which would not 
only save the lives of competitors, but also would bring in 
rich profits for the combiners. 

The anticipated economies and advantages were various. 
The number of salesmen could be substantially cut down, 
because under the combination one salesman could repre- 
sent the big business unit, approaching prospective buyers 

1 L. H. Haney, "Business Organization and Combination," pp. 
134-136. 



260 Management: Its Technique 

with samples and selling talk, whereas formerly each sepa- 
rate small company sent out its own salesmen. With 
many companies anxious to secure the same order, there 
was much duplication, and endless overlapping of effort. 
Advertising expenses could be reduced, because a host of 
small competing corporations devoted large sums to taking 
trade away from each other by lavish use of advertising 
space. Labor unions could be held under restraint more 
effectually because individual corporations stood almost 
helpless before the concerted strength of a national union 
threatening a strike to enforce labor demands. Large pro- 
ducers could afford full time use of very expensive ma- 
chinery, the most efficient labor-saving devices, and forms 
of equipment which it would not pay to use in small plants. 

The large business organization could place itself in a 
fairly secure and stable position by vertical integration. 
For example, the International Harvester Company could 
have not merely plants for the manufacture of farm imple- 
ments, but also its own coal mines, its own iron and steel 
plants, and even in some districts, its own railroad equip- 
ment; or, the United States Steel Corporation could own 
mines, mills, railroads, and ships. Saving in freight would 
be effected, because the combination would have plants lo- 
cated at various points the country over, and could ship to 
the buyer always from the nearest factory, thereby eliminat- 
ing the "cross-freights" which prevailed when the scattered 
plants were under sharp competition. The combination 
could bring greater pressure to bear in the collection of 
debts, and would not be obliged to make risky extensions of 
credit as under the days of severe competition when it was 
necessary to make shaky credit concessions to buyers in 
order to curry trade. The concentrated plant could carry 
a larger variety of lines and grades of goods to satisfy the 
whims and desires of all classes of customers, and could 
carry a stock large enough so that orders could be filled 
immediately, thus avoiding delays provoking to customers. 

Large producers could make full utilization of by-prod- 
ucts, and in many lines of production, the value of the 
by-products makes the difference between profit and loss. 



Management: Its Technique 261 

Large industrial concerns would be able to maintain labora- 
tories and departments for commercial research to advance 
the technology of production, and would be able to adopt 
promptly improvements and discoveries in the processes 
of manufacture. The big concern could buy in large 
quantities and secure inside prices and special discounts. 
It could secure better credit accommodations from the banks, 
and could afford to employ a superior grade of managers, 
engineers, efficiency experts, superintendents and the like. 
Output could be better regulated to avoid over-production 
in dull times, and under-production in boom times. Com- 
bination would give to all the member companies the ad- 
vantages of the patents, secret processes, trade marks, and 
brands which formerly had been jealously guarded by each 
individual company from its rivals. Large business or- 
ganization would be able to bring to bear at least a partial 
monopoly advantage in price determination, and would 
therefore be able to reap profits in excess of any that could 
be obtained by independent corporations. Net earnings 
would be materially enhanced by the economies in produc- 
tion and distribution on the one hand and the influence 
over prices on the other. 

These advantages of combination would probably never 
have made the strong appeal to the minds of business men 
which was necessary to launch the great combination 
movement had it not been for the fact that certain inter- 
ested parties, promoters, took it upon themselves to "sell" 
the combination idea to the bankers, the investing public, 
the boards of directors, the owners, and all parties con- 
cerned. It has been repeatedly stated by economic students 
that all business combinations owe their existence to the 
constructive imagination and irresistible initiative of some 
one man, or some very small group of men. Business 
combinations do not come into being without creative ef- 
fort on the part of somebody, and in the business world 
there are certain individuals who specialize in the promo- 
tion of corporate combinations. Often they are profes- 
sional promoters whose special life work is conceiving and 
executing first one business adventure and then another. 



262 Management: Its Technique 

The promoter may be a man of successful manufacturing 
experience, or an engineer, or a railroad executive. He 
may be actively engaged in a part of the business which 
he hopes to make a part of the eventual combination, or 
he may be a total outsider. "Whatever his origin, he per- 
forms certain vital and indispensable functions. His mind 
originates and grasps the idea of the possibilities of the 
new business organization. The promoter is an inventor of 
a new business plan, of a new corporation project. The 
promoter has the distinctive psychological makeup which 
asserts itself in the instinct of constructiveness, and the 
love of creative, original achievement. He has unbounded 
originality, a power of vision, a prophetic judgment of the 
future, and a delight in setting out upon new and moment- 
ous adventures. "Were it not for this type of personality, 
many of the most significant combinations would never 
be born. 

But this is only the first stage of the promoter's task. 
He must acquire a mass of statistical data, of financial 
evidence, of technical facts about production and mar- 
keting, and must fully acquaint himself with the basic 
policies of the branch of industry in which the com- 
bination is anticipated. From these facts, the promoter 
is able to explain convincingly the economies and advan- 
tages that will accrue from the new combination. It is 
necessary, also, to interest bankers in the project, and to 
levolve a financial plan for the capitalization of the com- 
pany, and for the sale of security issues. The bankers 
undertake the execution o£ the financial part of the venture 
usually through the formation of a syndicate of bankers 
to underwrite the stock issues of the new corporation. The 
syndicate of bankers thus accepts the responsibility of mar- 
keting the securities of the undertaking. The promoter 
has to persuade the owners and controlling powers in the 
separate companies to sell their properties, and this step 
is attempted through the securing of options giving the 
promoting interests the right to buy the properties at 
stated prices within stated periods of time. The promoter 
must have available satisfactory estimates of the probable 



Management: Its Technique 263 

earnings of the new company, and must be able to point 
out how and why these will almost surely exceed the col- 
lective earnings of the separate independent companies. 
To the owners of companies which have been suffering 
already from the thrusts of cut-throat competition, the op- 
portunity to sell and to save their fortunes is most welcome. 
In other cases, intensive urging and much persuasive power 
has been necessary, and even coercion must at times be 
resorted to. 

In order to carry through these difficult achievements, 
the promoter must be a party who commands the con- 
fidence of the people whom he is trying to combine. The 
promoter's task is "one that requires the very highest intel- 
ligence, and, as a rule, neutral parties — parties not inter- 
ested, men of the intelligence and reputations to inspire 
unlimited confidence on the part of manufacturers, are 
needed to bring manufacturers together."^ The promoter 
performs a specialized function of the utmost 'importance, 
because any number of the most effective business combina- 
tions could not come about merely as a result of the natural 
forces of economic life, or of the menace of sharp competi- 
tion. Someone has to take the initiative in overcoming the 
jealousies of men who have been desperate rivals for years ; 
someone has to allay the skepticism which springs up at 
the suggestion of a new adventure, and to lift men out of 
the inertia and lethargy which exists everywhere. For this 
service to the economic community, the promoter exacts 
a profit, commonly in the form of a bonus of the common 
stock. His work is extremely precarious, and he is as likely 
to fail as to succeed. In the successful promotions, the 
promoter usually charges all that the traffic will bear, and 
secures an appropriation of common stock which is gen- 
erous to say the least.^ 

Successes and Failures in Combination 

It is difficult to measure with exactness the extent to 

which the combinations formed under these conditions 

1 Meade, "Corporation Finance, Testimony of Mr. Flint," p, .39. 
^Ihid., pp. 21, 38, 39. See, also, Dewing's ''Corporate Promotions 
and Reorganizations," Chapter XX. 



264 Management: Its Technique 

have realized the economies and advantages which were 
claimed for them. In so far as they aimed at the suppres- 
sion of competition, they of course put an end to competi- 
tion between the companies which came into the consolida- 
tions. However, they found themselves face to face with a 
new competition in which the competing units were bigger. 
Even at the time of formation, it appears that the majority 
of the combinations controlled less than 50 per cent, of the 
production in their respective lines of industry. It was 
comparatively rare for a combination to control more than 
75 per cent, of the product. The hopes of optimistic pro- 
moters and the dreams of corporation executives for a 
domination of the market and a control of a given branch 
of industry were scarcely ever fully realized. Many of the 
combinations which started out with the highest percent- 
age of control have experienced a marked shrinkage of their 
percentage in recent years. For instance, during its first 
years, the American Sugar Refining Company refined from 
80 to 90 per cent, of the sugar refined in the United States, 
but by 1921, its percentage of the total output had fallen 
to about 24 per cent. And the United States Steel Cor- 
poration, from making 50.1 per cent, of the nation's iron 
and steel output in 1901 declined to 45.7 per cent, in 1911. 
And yet, although competition was not suppressed by the 
large combinations, the more dangerous and destructive 
phases of competition were brought under restraint and 
control considerably; and in the new era, large combina- 
tions were decidedly better able to protect themselves from 
the worst features of cut-throat competition. The inef- 
ficiencies of many over-sized consolidations, the anti-trust 
decisions of state and federal courts, and the governmental 
prohibitions of unfair competitive methods, have been 
causes behind the failure of so many combinations to realize 
in full their original hopes for the suppression of com- 
petition. 

The degree of success in so far as the expectation of 
increased net earnings was concerned met with similar 
limitations. Individual combinations here and there did 
earn impressive dividends. The oil, sugar, tobacco and 



Management: Its Technique 265 

steel consolidations were famous for their large earnings. 
The sensational earnings of certain combinations received 
much publicity, and so gave rise to the popular belief that 
practically all combinations were gaining luxurious profits. 
The true facts of the case are carefully summarized by 
H. E. Seager: **0f the 183 industrial combinations in- 
vestigated by the Census Bureau in 1900, but 121 had paid 
dividends. . . . One-third of the total number paid no 
dividends at all and another one-third paid no dividends 
to common stock holders. Nor has this showing been 
greatly improved in the years that have elapsed since 
1900. An intensive study of the thirty largest trusts 
which were organized prior to January 1, 1904, shows that, 
while eight have been phenomenally successful, and seven 
moderately successful, ten have proved unsuccessful and 
five have been disastrous failures."^ The combination 
movement fell far short of its hopes and promises. The 
anticipated economies too often proved to be illusions, and 
the advantages of large scale production which had loomed 
so attractively in the arguments of promoters proved to be 
offset time and again by even greater handicaps and dis- 
advantages arising from unwieldiness and overgrowth. The 
history of the combination movement, in all its ups and 
downs, teaches pre-eminently one economic lesson of the 
greatest significance, namely, that the economies and ad- 
vantages of large scale business tend to disappear after 
the business unit gets beyond a certain size. A point is 
reached beyond which the economies and advantages are 
displaced by wastes, inefficiencies and disadvantages of the 
severest sort. The size of maximum advantage and econ- 
omy varies from industry to industry and from decade to 
decade, owing to changes in the state of the industrial 
arts and sciences. 

In a broad way, those industries will bear the largest 
size of business unit which can most thoroughly substitute 
mechanical processes for the workmanship of human beings. 
Industries whose processes can be standardized, in which 

1 "Principles of Economics," 1917, pp. 455-456. See, also, A. S. 
Dewing, Quarterly Journal of Economics, Vol. 36, pp. 84-102. 



266 Managerneni: Its Technique 

automatic and semi-automatic machinery can be utilized, 
in which mechanical conveying and transporting and hoist- 
ing can be taken advantage of, and in which the human 
element can be reduced to a subordinate importance, realize 
the economies of large scale production. As the mechani- 
cal technology advances in a branch of industry, and 
methods of standardization are improved, the way is paved 
for large units of business organization. To the extent 
that labor is involved in such highly developed mechani- 
cal processes, its efficiency is substantially regulated by the 
necessity for keeping up with the machine. In the meat 
packing plants, for example, the animal is conveyed by 
machinery past the worker, and it is necessary for him to 
perform some narrow, specialized act, completely, while 
the animal is traveling in front of him. The speed of the 
carrying machinery thus regulates the speed of the worker. 
The same is true of the processes of standardized automo- 
bile manufacture, and in any number of other industrial 
branches. In lines of production where definite regulation 
of the worker's speed by the mechanical processes is not so 
fully possible, it is important to note that even if the 
worker is inefficient, his labor is a minor part of produc- 
tion cost. 

However, the possibility of large scale economies is 
sharply reduced where skill, workmanship, personal in- 
terest, and individual devotion to duty are a major part 
of the business process. The large company loses the hu- 
man touch with the workers. Workers come to think of 
the executive officials often as remote and mysterious 
powers, interested solely in grinding out maximum profits, 
and the psychological reaction is sulkiness, indifference to 
work, disloyalty to the company, and personal inefficiency. 
Combinations of industry have found it exceedingly dif- 
ficult to avoid diminishing labor efficiency under increasing 
industrial size. The human factor has stubbornly resisted 
efforts at standardization, and the failure of the original 
promoters of the great combinations to take into account 
this basic psychological element explains in large measure 
the repeated disappointments in the efficiency of the com- 



Management: Its Technique 267 

binations. Primarily for the reasons that human factors 
play a dominant part in their processes of production, the 
cotton manufacturing industry and the men 's and women 's 
clothing manufacturing industry have not been brought 
under the regime of concentrated production. 

It is also true that in those branches of industry where 
standardized mechanical processes can be drawn upon, the 
independent corporation may secure substantially as great 
efficiency as the enormous combination. In such indus- 
tries there is no insurmountable difficulty to the attain- 
ment of efficiency under the large organization, but, on the 
other hand, the gigantic organization is not necessary for 
the attainment of maximum efficiency. Reasonably strong 
independent companies can install the mechanical equip- 
ment as well as the huge companies, and can realize in good 
measure similar economies. Gigantic combination in such 
lines of industry is not an essential condition of the great- 
est efficiency. 

The greatest single snag in the way of large scale enter- 
prise is a psychological one. For one thing, it is next to 
impossible to find leaders with the instinctive and mental 
equipment adequate to direct the large undertakings. The 
captains of industry of one generation must be superseded 
by new captains in the succeeding generation, and busi- 
ness organizations suffer from a dearth of the very best 
managerial ability. The salaries offered range from $15,000 
to more than $100,000 a year, and the positions carry such 
power and prestige that they are coveted intensely by 
the leading men of the country. But there is a limit to 
the tasks which even the best brains can master, and there 
is a very narrow limit, very commonly lamented by boards 
of directors in search of executives, to the supply of the 
best brains.^ A billion dollar corporation entails problems 
of administration and control which only the rarest exec- 
utives can solve effectively. 

The large combinations embody a dozen, or a score, or a 

iSee A, Marshall's "Industry and Trade," pp. 360-364; Stevens's 
"Industrial Combinations and Trusts," pp. 574-575; Brown's "Selec- 
tion and Training of Executives," pp. 1-46 and Introduction. 



268 Management: Its Technique 

hundred or more separate plants, scattered across the coun- 
try. Each subsidiary plant must have executive officials 
of high ability, and it is no small task to inspire a small 
army of subordinate officials, with whom the president 
over all is seldom in personal contact. The various sub- 
ordinates have to be infused with the spirit of the head 
of the combination, have to understand the application 
of the broad policies and basic ideas which he desires to 
have worked out in the several plants, have to be made to 
feel a keen sense of responsibility and loyalty to the com- 
bination. When the managers of the various plants do not 
have their own money tied up in the property, there is 
a double difficulty in leading them to devote their best 
energy and ability to their position. They do not plunge 
into the task with all their strength as they might if the 
business were their own. Especially are they apt to as- 
sign the burdensome, tedious, aggravating parts of the posi- 
tion to others, and to neglect the drudgeries which might 
not eeem so onerous if the plant actually belonged to the 
manager, and all the pride of personal fortune were at 
stake. In cases of independent corporations, of the small 
or moderate sized variety, no amount of plugging, no 
amount of indefatigable, painstaking effort is too great for 
the taste of the men whose all is at stake in success or fail- 
ure. The modern president must be able to create morale 
among his subordinate executives, and in the largest busi- 
ness organizations, this possibility is strained to the break- 
ing point. Big business is a question of the best motives 
of the biggest men in the country. And the problem of 
bringing forth the best psychological powers of executives, 
yet not overstraining the human equipment; of securing 
maximum efficiency from the best minds, yet not subject- 
ing them to a business unit so great in its scope as to 
baffle thei. judgment and thwart their personality, is one 
which largely determines the size to which modem business 
enterprises can successfully grow. 

The psychological difficulty extends down the line from 
the topmost executive to the common laborer. Foremen 
are men subject to strong bonds of habit, and tradition, 



Management: Its Technique 269 

and all attempts made by superiors to better their touch 
with laborers come up against the recalcitrance and fixity 
of the foreman's psychology. In the mind and experience 
of the laborer, the foreman represents the company, and 
is the symbol of what the company stands for. In most 
companies, workers are at the mercy of foremen, bossed 
by them, paid by them, chosen by them, fired by them, 
promoted by them, and in the eyes of workers, modern 
industrial autocracy very widely means simply the petty 
tyranny and capricious domination of foremen.^ The per- 
sonal touch between the owner and worker in the small 
plant is gone, and the large corporation is a great imper- 
sonality, interpreted to the workers through the medium 
of petty bosses and foremen. 

The imperfect human relations of large corporations 
have been prominent forces in the disappointments and fail- 
ures of large businesses in the past. It is most significant, 
however that in recent years, and particularly as an out- 
growth of the World War, pioneer leaders of great corpora- 
tions have demonstrated the practicability of a new sci- 
ence of human relations. Many leading corporations have 
created Departments of Industrial Relations, the basic pur- 
pose of which is to organize the human factor in industry. 
Practical experience has already worked out a body of 
scientific principles of labor relations and control for the 
effective treatment of the human industrial problem. This 
body of principles includes such matters as the inaugura- 
tion of employees' representation in the form of works coun- 
cils or shop committees, the adjustment of questions of 
hours and wages in frank consultation with workers, the 
systematic stimulation of right incentives and motives in 
work, the better care of employees through improved light, 
heat, ventilation, and safety facilities, the development of 
a spontaneous confidence in company policy by suggestion 
systems, collective bargaining, medical care, vacations, and 
insurance aid. This new science of human administration 
goes far toward overcoming the original handicaps of large 

1 S. Webb, "The Works Manager Today," p. 27. See, also, Whiting 
Williams, "What's On the Worker's Mind?" Chapters 11-14. 



270 Management: Its Technique 

business organizations in dealing with the labor factor. 
Once the psychology of labor has been brought under ade- 
quate control, the economies of large scale production need 
not be confined primarily to industries operating under 
mechanical and standardized processes, but will be possible 
in an enlarging degree for industries in which human skill 
and personal interest are major factors. The very recent 
developments in the science of industrial relations have a 
direct bearing, therefore, upon the most efficient size of 
business units, and upon the possible economies of large 
consolidations. 

The trials and difficulties of large business lead, more- 
over, to an analysis of some of their fundamental relations 
to bankers and financial interests. The intimate relations 
established between new corporation promotions and the 
investment bankers and syndicate of underwriters which 
float the corporation securities; the banking connections of 
boards of directors which are of aid in the maintenance of 
adequate credit for working capital purposes; the ties 
formed between railroads and other corporations and their 
bankers during periods of receivership and reorganization; 
and the confinement of the attention of boards of directors 
very largely to questions of finance, all serve to subordinate 
nearly all other corporation problems to the uppermost 
problem of corporation finance. The history of the finan- 
cial relations of the great American trusts certainly bears 
out the broad conclusion made by a careful English econo- 
mist, Alfred Marshall, that ''a great part of the railways 
and the chief manufacturing and mining businesses of 
America are largely under the control, for good and 
evil, of a comparatively small number of powerful finan- 
ciers. ' '^ 

A widely adopted form of this financial influence is found 
in interlocking directorates. Each one of the members of 
a bank's board of directors, and its major executive officials 
may be members of the boards of anywhere from half a 
dozen to half a hundred corporations. The Clayton Act 
of 1914 prohibits interlocking directors between corpora- 

1 "Industry and Trade," p. 540. 



Management: Its Technique 271 

tions which, by the nature of their business, are actual 
or potential competitors, where interlocking directorates 
might tend to restrain competition unduly. The act is not 
a sweeping prohibition of all interlocking directorates, 
but rather a prohibition aimed to thwiart interlocking 
which would have as its effect the building of monopoly 
advantages or the unreasonable restraint of competition. 
Interlocking directorates are still permissible where they 
do not encroach upon this prohibition, and hence they 
exist at present on a broad scale, and are important fi- 
nancial connecting links between corporations and financial 
houses. There is nothing in this relationship which in- 
dicates a "money trust," or a conspiracy of bankers to 
dominate the business of the country, a charge which is 
often loosely made. The true significance of the relation- 
ship is simply that *'the structure of modern capitalism 
tends to throw an ever-increasing power into the hands 
of the men who operate the monetary machinery of in- 
dustrial communities, the financial class. "^ 

The financial needs of the large consolidation for work- 
ing capital, raw materials in process of manufacture, pay 
envelope funds, etc., are largely accommodated by com- 
mercial borrowing from banks; and the greatest vigilance 
is necessary on the part of the corporation's overseers to 
have ample funds available to pay off such loans at the 
proper periods, or to have the state of the business strong 
enough to make bankers feel safe in extending loans in- 
stead of exacting prompt payment. In times of business 
depression or crisis, with the assets of a corporation de- 
preciating in value, and a general psychological anxiety 
throughout the banking community, the corporation must 
be able to meet promptly its commercial credit obligations 
in ease the banks feel it necessary to liquidate the obliga- 
tions. Failure to meet the obligations when demanded 
means a state of insolvency. The constructive aid of affil- 
iated financiers is of life-saving value at such critical 
periods, and in numberless instances, a lenient and co-opera- 
tive attitude on the part of the financial institutions is the 

1 J. A. Hobson, "The Evolution of Modern Capitalism," pp. 235-257. 



272 Management: Its Technique 

only factor which makes it possible for the large corpora- 
tion to "round the corner" of the critical period. More- 
over, the borrowings of the corporation for purposes of 
fixed capital, such as buildings, or machinery, entail cer- 
tain interest charges which have to be met regularly. Fail- 
ure to meet the interest charges means a state of insolvency. 
The ultimate source of payments of all credit obligations 
is the earnings of the corporation. If these earnings 
are not large enough to meet the payments when due, no 
matter whose the fault, the corporation is ready for bank- 
ruptcy. But it happens with any number of corporations 
and their financial backers that during a period of pros- 
perity, with profits running high and business booming, 
the optimism of the times grips the imagination of the 
corporate overseers, and impels them to over-expansion, 
over - capitalization, over - borrowing. Time and again, 
bankers and corporation directors prove victims of their 
own psychology, and in the great tide of money making 
and expanding and building of a period of prosperity, they 
forget the law of business cycles, forget that a little later 
on will come the return swing of the pendulum, with de- 
pression, low earnings or actual losses, hard times, tight 
money, and general liquidation. When the turn does come, 
the financial overseers of the corporation try often to keep 
up appearances by paying dividends whether they have 
been earned or not, and this effort is the paramount im- 
mediate cause of the bulk of industrial bankruptcies.^ 
The financial interests unfailingly endeavor to keep the 
price of securities on the investment market at desired 
levels, and of course face the problem of maintaining am- 
ple value in the stocks and bonds serving as collateral se- 
curity for much of the corporation's commercial credit. 
Even at best, with all financial interests unselfish, and de- 
voting intelligent attention to the welfare of the consoli- 
dation, the financial status of the corporation requires the 
most painstaking vigilance. Under less favorable mo- 
tives, with occasional recklessness or selfishness on the part 

1 A. Dewing, "Corporate Promotions and Reorganizations," pp. 
546-557. 



Management: Its Technique 27 i^ 

of dominant financial interests, or with excessive greed for 
immediate power or profit, the financial status of the busi- 
ness combination has in numerous instances been deplor- 
able. In certain cases, large scale fraud in the manipula- 
tion of securities and speculation where conservatism was 
sorely needed have ruined corporations, and brought un- 
told loss to innocent and helpless investors. New England 
people will not soon forget the manipulations, which the 
Interstate Commerce Commission so vigorously con- 
demned, in the affairs of the New York, New Haven and 
Hartford Railroad.^ 

AH of these financial complications continually present 
grave problems for the large combinations to solve. Their 
relations with the financial institutions must in the very 
nature of the case be fairly intimate. The large consoli- 
dations in almost every line of industry are constantly 
drawn into close contact with the investment and com- 
mercial bankers. The influence of the financiers upon the 
directorates of modern large corporations is a natural out- 
come of the structure of corporate institutions.^ 

From all the foregoing facts and considerations, it is 
obvious that many of the large consolidations have by no 
means had easy sledding. Disappointments from unreal- 
ized efficiencies and economies have been frequent, and 
illusions about rich earnings have been repeatedly ex- 
ploded. The consolidation movement had its greatest in- 
nings at a period when the American people were whisked 
off their feet by a temporary awe of and credulous trust 
in bigness. The grandeur of size caught the imagination 
of bankers, of business men, and of the people. It 
was accepted without proof that if a business could but 
become big enough, its economies would be almost unlim- 
ited and its earnings would be wellnigh fabulous. The 
psychological bubble was pricked by the hardships of 
costly experience and the disappointments of corporation 
history. Through all the period of consolidation and con- 

iSee, also, W. Z. Ripley's "Trust Pools and Corporations," pp. 
23-30. 

2 H. G. Moulton, "Money and Banking," Chapter XI. 



274 Management: Its Technique 

centration, those trusts which had to rely for their suc- 
cess mainly upon the economies and efficiencies of large 
scale operation have either met with indifferent success or 
have failed outright. The trusts with glowing records of 
high dividends and huge profits are usually those which 
attained a substantial power of monopoly over prices, and 
who held a position from which they could take unfair 
advantage of the surviving small competitors. Either this, 
or they had for a time the leadership of an executive of 
the rarest ability, one of the towering captains of industry 
of the last generation in America who had the genius to 
make a go during their lifetimes of an otherwise scarcely 
profitable consolidation.^ 

The part which management plays in the whole eco- 
nomic organization is obviously a leading one. Manage- 
ment is to-day divorced from ownership. Owners are 
holders of corporate securities, and need have no direct 
interest in the properties nor give any personal attention 
to their care and government. Managers work for a salary 
primarily, although in places they also are interested as 
part owners in the business. Directors of banks and cor- 
porations concern themselves mainly with financial matters, 
leaving questions of labor, production and technique to 
the presidents, vice-presidents and engineers of the plants. 
Profits go, not to the men who manage the business, but 
mainly to those who own the business. The psychology of 
management shows that bankers and corporation execu- 
tives are men usually of rare and great mental and instinc- 
tive equipment, but that a large proportion of them, or all 
of them, will be found subject to the sway of customs, tra- 
ditions, and habits. Optimism gets the better of them 
during periods of prosperity, and miscalculation leads 
their businesses into precarious positions repeatedly. Iner- 
tia and prejudice keep thousands of them from taking up 
with the latest improvements in machinery and technology 
of production, and inability or unwillingness to handle the 

1 See A. Dewing's "Corporate Promotions and Eeorganizations ," 
pp. 563-568. Also W. S. Stevens's "Industrial Combinations and 
Trusts," pp. 574-580. 



Management: Its Technique 275 

technique of the modern science of management causes ap- 
palling wastes throughout the economic system. On the 
other hand, modern corporate management has increased 
the productivity of the individual worker by making possi- 
ble the large scale use of machinery. Modern management 
directs the economic energies of society with a degree of 
efficiency which surpasses any other form of economic 
government that men have yet contrived. 

The shortcomings of management indicate primarily the 
lines of evolution for the future. The recent determination 
of management to organize human relations in industry 
is an admirable example of the ability of management to 
adapt itself to the challenging difficulties of a particular 
period. The extremes and excesses of managerial policy 
appear to be coming under control. The tests of business 
success are now more than ever before seen in the increas- 
ing attitude that exploitation of labor as a means of reap- 
ing profits must be a thing of the past; that abuse of in- 
vestors' money deserves criminal prosecution; and that 
moderation in the use of monopoly advantages and stability 
rather than exorbitance of prices is desirable. 

In days gone by, capital was a term which covered both 
management and ownership. Recent economic evolution 
has brought out the manager as a distinct and separate 
factor. The overmastering characteristic of successful 
management is a threefold responsibility: to the public, 
courteous service, standard quality of goods, reasonable 
prices; to the owners, safe-keeping of investments, and 
moderate profits; to the laborers, living wages, democratic 
treatment, healthful working conditions, a creative inter- 
est in work. The day when the responsibility of business 
was selfishly looked upon as almost an exclusive responsi- 
bility to owners, — a responsibility to harvest the maxi- 
mum profits, without fear or favor, — is beginning to pass. 
The modern manager of the best type recognizes a three- 
fold responsibility for the positive benefit of laborers, own- 
ers, and consumers. The test of successful management 
is the performance of this balanced threefold responsibility. 

The characteristics of the present economic period re- 



276 Manageme7it: Its Technique 

fleet again and again the problem of the size of the busi- 
ness organization. The question of big business or little 
business is one calling for incessant attention. It may 
safely be declared that the question has not yet been fully 
decided. And yet, out of the tendencies and developments 
of the last decade, certain fundamental lessons can clearly 
be read. The large business unit has come to stay. A re- 
turn to the old days of laissez-faire competition between 
little business establishments is unthinkable. A new com- 
petition has come into activity, — a competition between 
bigger parties. In the branches of industry where con- 
solidation has gone far, the biggest combinations operate 
in the same field with a dozen, or a score, or a hundred in- 
dependents. But the independents themselves are larger, 
and the competition which now exists is none the less com- 
petition because it prevails between larger business units. 
For a time, the public and the courts seemed inclined 
to destroy big business merely because of its size. That 
inclination is on the wane, and in its place has come the 
more matured inclination to outline the new rules of the 
game in such a fashion as to give businesses both large and 
small a chance for a trial of strength on issues of efficiency 
and economy. The Supreme Court has declared emphati- 
cally that under the Sherman Anti-Trust Law of 1890, it 
will not condemn business merely because it has grown 
large. If it is not guilty of unfair and destructive competi- 
tion, if it is not holding its position because of unreasonable 
restraint of trade or undue monopoly power, if it can 
remain large or grow larger while still playing the game 
under the new rules; if it can carry on its large scale 
enterprise with efficiency under those rules, it may con- 
tinue in existence, no matter what its size. The size of 
maximum efficiency will vary with each branch of economic 
activity, and trial and experiment alone will decide in 
each case where the point will lie. Where modern business 
management is recalcitrant, and dodges persistently the 
rules of fair dealing with competitors, with labor, with 
owners, with the public, the instruments of public control 
are not wanting. Regulating commissions, price fixing com- 



Management: Its Technique 277 

missions, public service commissions, publicity and investi- 
gating commissions, are available already, and others can 
be easily created by a public acquainted with the means of 
control set up to meet the needs of the country during the 
period of the World War. The blind fear of monopoly and 
the blind trust in competition are both giving way to a 
discovery that there is something useful to the economic 
community in that degree of monopoly which accompanies 
large scale business or which takes the form of open co- 
operation between concerns in a given line of trade; and 
that there is something dangerous in the form of unbridled 
competition which is ruinous and deadly for the competi- 
tors. 

More and more, the modern type of business govern- 
ment makes room for co-operation in economic activity. 
Business can still compete, yet in many policies serve the 
community and itself better by taking counsel and by co- 
operation which will bear the light of publicity. Destruc- 
tive competition gives way to constructive competition ; and 
monopoly in restraint of trade gives way to co-operation 
in the aid of trade. The new standards of competition and 
the new standards of co-operation are still in the process 
of development and evolution, but their features are now 
distinct enough to make clear that a reconstruction of the 
size and character of business management has been taking 
place in recent years. The reconstruction of business man- 
agement along the lines of responsibility to consumers, 
owners and workers is a cardinal feature of the economic 
developments of the last generation. 

REFERENCES 

Marshall: Industry and Trade, pp. 140-177, 197-249, 308-394 

Commons, J. R. : Industrial Government 

Brandeis, L.: Business — a Profession 

Jones, E. : The Trust Problem of the United States 

Adams, H. C. : Description of Industry, Chapters VII, XIII, XIV 

Clay, H.: Economics for the General Reader, Chapters III, V- 

VIII, XXIII-XXIV 
Marshall and Lyon: Our Economic Organization, Chapters 

;xv-xviii, xxi-xxv 



278 Management: Its Technique 

Marshall, L. C: Readings in Industrial Society, Chapters 
X-XV 

Bloomfield, M.: Management and Men 

Bloompield, D. : Employment Management 

Federal Commission on Industrial Relations, 1915, Final Report 

Bassett, W. R.: When the Workmen Help You Manage; The 
Organization of Modern Business 

Veblen, T.: The Vested Interests and the State of the Indus- 
trial Arts; The Engineers and the Price System 

Wood, C. W.: The Great Change 

LiPPiNCOTT, I.: Economic Development of the United States, 
Chapters XXI-XXVII 

Baker, R. S.: The New Industrial Unrest 

Gantt, H. L. : Industrial Leadership; Organizing for Work 

HoxiE, R. F.: Scientific Management and Labor 

Kester, R. B. : Accounting 

Paton and Stevenson: Principles of Accounting 

Brisco, N. a.: Economics of Business 

Copeland, M. T. : Business Statistics 

Duncan, J. C. : Principles of Industrial Management 

Duncan, C. S.: Commercial Research 

Frederick, J. G. : Business Research and Statistics 

GowiN, E. B.: The Executive and His Control of Men 

Jones, E. D.: Administration of Industrial Enterprises ; The 
Business Administrator 

Taylor, F. W. : Scientific Management 

Shaw, A. W.: An Approach to Business Problems 

Thompson, C. B. : Scientific Management 

Veblen, T.: Theory of Business Enterprise, Chapters I-IV, X 

Tipper, H.: The New Business 

Wilson, W.: The New Freedom 

Stevens, W. S.: Industrial Combinations and Trusts 

Haney, L. H. : Business Organization and Combination » 

Kimball, D. S.: Principles of Industrial Organization 

Redfield, W. C. : The New Industrial Day 

Scott, W. D.: Increasing Human Efficiency in Business 

Rowntree, B. S.: The Human Factor in Business 

Committee of Federated American Engineering Societies, Waste 
in Industry 

Lewisohn, S. a.: Atlantic Monthly, Vol. 126, pp. 414-418 



CHAPTER IX 

MARKETS— THEIR PRINCIPLES AND STRATEGY 

The market is the buying and selling institution of the 
economic system. Goods and services are not exchanged 
directly, as a rule, but indirectly by the use of a medium 
of exchange, i.e., money. In everyday life, the value of 
goods and services is thought of in terms of money and 
of price. The amount of money which we exact before part- 
ing with goods or services, or the amount of money with 
which we are willing to part in order to obtain the goods or 
services of some one else is a pecuniary measure of value. 
In the market, goods or services are worth to us individual- 
ly the amount of money which we are willing to surrender 
in order to secure them. Most of the feeling and thinking 
which goes on in the markets of modern society clusters 
about prices. Instead of stating that a suit of clothes is 
worth twenty bushels of wheat, we state that a suit of 
clothes is worth forty dollars, and that with wheat at two 
dollars a bushel, twenty bushels of wheat are worth as much 
as a suit of clothes. All commodities that are bought and 
sold, — pig iron, bread, diamonds, coal, — pass through the 
market at a money price. By putting prices on different 
grades and types of labor, on books, poetry, music or pic- 
tures, on educational services, on executive ability, or on 
shoes, corn, furniture and an innumerable mass of things, 
it is possible to arrive at value comparisons. 

There are two important aspects of the concept of value. 
On the one hand there is a positive quantity of desirability 
or appeal in any specific commodity or service taken by 
itself; on the other hand, there is a comparative element 
in the degree of desirability found in various commodities 
or services. The former aspect has often been termed 
''value in use," and the latter aspect, "value in exchange.'* 

279 



28p Markets^— Their Principles and Strategy 

Economic terminology, in describing the former aspect 
of value, has employed a wide variety of words. Goods 
have "utility," which is the "power to satisfy human 
wants. ' ' Each good or service arouses a certain ' ' quantity 
of desire, " an " intensity of desire. ' ' Each offers a certain 
amount of "gratification," or of "satisfaction." In ex- 
plaining the comparative aspect of value, economic termi- 
nology has included such statements as that "value is the 
power of a good to command other goods in exchange," or 
that "value is the rate at which a commodity exchanges 
for others." 

The positive and the relative aspects of value are two 
different phases of the same thing. Value is not exclusively 
a relative nor exclusively an absolute concept, — it is both. 
Marketing institutions are organized around the values of 
commodities. The market provides a structure of buying 
and selling, through which values are compared, estimated, 
created, diminished. The money unit of measurement 
translates values into a common language of prices, and 
thereby makes possible on a gigantic scale the trading be- 
tween buyers and sellers for the satisfaction of human 
wants and desires. 

The marketing branch of economic activity has expanded 
immensely in modern times. The income of the laborer, 
the business manager, the investor or the professional man 
is a money income. These people receive payment for 
their efforts, not in tangible commodities, but in a sum of 
money with which commodities can be purchased. Even in 
the agricultural industries, a major part of productive 
effort is devoted to preparing commodities for sale in the 
market, and only a small fraction of the farmer's crop is 
devoted to his personal consumption. He sells it for a 
sum of money, and, with the money purchases other com- 
modities to satisfy his wants as a consumer. 

The business of buying and selling has come to occupy 
more and more of the time and energy of employers and 
employees; and distribution has come to be a most im- 
portant factor in the economic system. The impressive 
fact of the case to-day is that it costs more to market the 



Markets — Their Principles and Strategy 281 

average article than to produce it. ' ' It costs more to sell the 
world's goods than to make them."^ This increasing im- 
portance of marketing has been strongly noticeable during 
recent years. One authority estimates that the number of 
people required to distribute one thousand dollars' worth 
of goods, has increased over 50 per cent, in the last twenty 
years.^ Buying and selling are, therefore, of basic im- 
portance in the range of economic activities, and the laws 
determining values and prices in the course of the market- 
ing process deserve careful study. 

Values and prices are not set in a purely arbitrary way 
by inexorable, fixed economic laws. There is a surprising 
amount of flexibility, and elasticity in the influences bear- 
ing upon prices. There is room for an immense amount 
of human strategy in manipulating the factors which in- 
fluence prices. But there are certain broad and funda- 
mental principles which underlie prices and values. These 
are often termed laws of economics, and the term is cor- 
rect if it does not mislead one into supposing that the so- 
called laws are absolute, unwavering, unswerving, leaving 
little or no room for human cunning, manipulation, and 
strategy. 

The Cost of Production Theory of Prices 

One economic theory is that prices tend to approximate 
the cost of production of goods. If prices soar far above 
the cost of production the profits will be so high that busi- 
ness men will flock to that branch of activity and by their 
increased production and increased competition will tend 
to force prices down to normal levels, i.e., levels approxi- 
mating the cost of production. If prices fall below the cost 
of production, men will be losing money and will retire from 
that branch of business in such numbers that the supply 
will fall off and under the scarcity of supply, prices will 
rise to the normal level, i.e., the level approximating the 

1 C. W. Gerstenberg, "Principles of Business," p. 404. See, also, 
G. B. Diblee, "Laws of Supply and Demand," Chapter VI. Especially 
p. 62. 

2 J. G. Frederick, "Business Research and Statistics," pp. 102-105. 
See, also, Nystrom, "Economics of Eetailing," p. 14. 



282 Mm'kets — Their Principles and Strategy 

cost of production. Selling prices cannot long stay below 
cost of production without ruining the branch of industry 
concerned. Selling prices below the cost of production 
indicate selling at a loss, and loss, unless checked, leads 
rapidly to bankruptcy. Hence the cost of production sets 
a minimum level below which prices must not fall for any 
considerable length of time. 

Above this base line there is room for the play of com- 
petition among dealers, for monopoly price maintenance, 
for varied strategy and ingenuity. Profiteers may reap 
rich harvests from forcing prices for a time well above 
the base line of cost of production and speculators may 
take advantage of the play of price movements to effect 
their speculative gains. 

The cost of production which sets the base line of prices 
varies greatly between producers. Some producers put 
their goods out with a low cost, others with a high cost. 
The difference between the most costly production and 
the least, is often very marked. A concern which is unfa- 
vorably located, which has to buy raw materials in small 
quantities, which has inefficient management, which has 
constant labor troubles and a wide variety of other diffi- 
culties, suffers from a high cost of production. Another 
concern in the same branch of production which is free 
from such difficulties enjoys low cost of production. This 
gives rise to an important economic question: which cost 
of production, the high or the low, establishes the standard 
for prices? Do the expensive plants, the poorly located 
and poorly managed plants, set the price standards? Or 
are the standards set by the efficient, booming, brilliantly 
handled and fortunately located plants? For certain rea- 
sons which can be very briefly explained, it is the high 
cost plants which tend to set the level below which prices 
must not fall. The plants with highest cost would have 
to go out of business if prices fell below their cost of pro- 
duction. They would lose money from prices inadequate 
to cover their costs and would of necessity close down. 
But society would then find its supply of goods in that 
branch of production insufficient. The plants of low pro- 



Markets — Their Principles and Strategy 283 

duction cost cannot supply the entire need and demand 
of society. The plants of high production cost must be 
continued in operation if the total supply is to be adequate. 
The high costs of the latter group of concerns are known 
as marginal costs. Marginal costs are the costs of those 
concerns which are just on the margin between life and 
death. Their costs are so high that they can barely keep go- 
ing at the prices prevailing. They are the producers who 
are just able to make both ends meet and no more. They are 
the ones who can scarcely keep their heads above water. But 
because what they do produce is indispensable, because so- 
ciety cannot do without it, these marginal producers have 
to be paid prices high enough to meet their high costs. 
Hence it comes about that this high level becomes the gen- 
eral level for the market. Marginal cost, i.e., the cost for 
the man who can barely make prices cover his expenses, 
sets the minimum below which prices must not fall for 
everybody. Meantime the other producers, with lower 
costs, find themselves making royal profits, through no 
fault of their own, but through the necessity on the part 
of society of keeping the costly producers alive in order 
to make production adequate to meet society's needs. 

The operation of this principle is well illustrated in the 
production of coal. Some mines are able to produce coal 
very cheaply. By virtue of the use of modern mining ma- 
chinery, of efficient administration of labor, of the nearness 
of the coal bed to the surface of the ground, of easy trans- 
portation, and of many other favorable factors, these 
mines enjoy a very low cost of production. At the other 
extreme is a group of coal mines whose cost of production 
is excessively high. They are too small to employ the best 
machinery, they are bothered with flooding by water, they 
suffer from restriction of production by labor, their man- 
agement is inefficient, their transportation facilities are 
poor, — for a wide variety of reasons it costs this group of 
mines much more to produce a ton of coal than it costs the 
highly favored mines. But the coal supply of the coun- 
try will be inadequate unless these low grade mines are 
continued in operation. The price of coal must be high 



284 Markets — Their Principles and Strategy 

enough to cover their abnormally great cost of production. 
A price at such a height, however, is much above the costs 
of the high grade mines. This excess represents for the 
high grade mines so much profit. The country has to pay 
a price for coal which will keep the low grade mines run- 
ning, or suffer a coal famine. On such a price the high 
grade mines reap a rich margin of profit. In between these 
extremes of high grade mines and low grades are numer- 
ous intermediary grades, all of which secure the price set 
by the cost of production of the low grade mines. The cost 
of production in the low grade mines is the marginal cost 
for the coal industry and sets the price of coal for all. 

Price fixing during the war was generally based upon 
this principle of marginal cost of production. The cost of 
production of the various grades of producers was arrived 
at from figures supplied by the Federal Trade Commission. 
F. W. Taussig, from experience as Chairman of the Price 
Fixing Commission of the War Industries Board, directing 
price fixing in such commodities as iron, steel, copper, lum- 
ber, wool, hides, cotton fabrics, sulphuric acid, nickel alu- 
minum, brick, cement, etc., stated the principle of price fix- 
ing as follows: *'It was cost of production at the hands 
of the marginal or bulkline person that usually formed the 
basis of the prices fixed. ' '^ Producers with low costs would 
reap large harvests, but they were caught by the excess 
profits tax. 

Statistical studies of costs and prices indicate that the 
principle applies about the same in normal times as in 
war times under price fixing. In fact, the methods used 
in price fixing were simply the carrying over of normal 
price principles into the war conditions. A careful study 
of Federal Trade Commission statistics, made by Kemper 
Simpson covering book-paper, newsprint, salmon, sugar 
beets, and coffee, led to the finding that ''price approxi- 
mates bulkline or marginal cost under normal conditions 
of competition."^ Statistical studies, therefore, from the 
facts available, tend to bear out the general theory of 

1 Quarterly Journal of Economics, Feb., 1918, p. 240. 

2 lUd., Vol. XXXV, p. 287. 



Markets — Their Principles and Strategy 285 

marginal cost as the standard which, establishes price 
levels where a fair degree of competition prevails. But it 
would be misleading to infer that marginal costs are the 
only factors influencing prices. They are simply one of 
the factors and their full bearing can be understood only 
as they are compared with the other price determining 
factors which are working simultaneously. 

Supply and Demand 

The price theory of supply and demand is undoubtedly 
the explanation which most widely appeals to the popular 
mind. It is very common, indeed, for lawyers, business 
men, and even economists to attempt an explanation of 
almost every baffling price problem by a vague and gen- 
eral reference to supply and demand. The phrase serves 
as a kind of blanket explanation to cover every confusing, 
perplexing price question, Avhereas in reality what is needed 
is a clarifying analysis of the principles of supply and 
demand to determine how they work out, and to what 
extent they work out, in actual practice. 

The broad principle of supply and demand is that price 
is determined by the relative strength of supply of and 
demand for any commodity or service. If supply increases 
in proportion to demand, price falls; if supply decreases 
in proportion to demand, price rises. Likewise if demand 
increases or decreases in proportion to supply, price reg- 
isters the fluctuation. It follows, too, that if a large supply 
is thrown upon the market, and prices fall, more goods will 
be consumed because more can be bought at the lower price 
level. If sellers have on hand a large store of goods which 
they are determined to get rid of, they may sell the goods 
by offering them at a lower price. If the owners wish to 
hold their goods, they may offer them at prices high enough 
to discourage buyers from taking the goods in any consider- 
able quantities. On the other hand, if buyers need goods 
and their demand is urgent, they will pay high prices rather 
than go without the goods. If consumers want more goods, 
they must pay higher prices. The value of goods and the 
prices which serve as an index of value fluctuate in pro- 



286 Markets — Their Principles and Strategy 

portion to the fluctuations of demand and supply. The 
general theory states that the more goods available the less 
you will pay and the less goods available the more you will 
pay. When the price of a certain commodity rises it is an 
invitation to new producers to enter the field, and as they 
gradually increase the supply of the commodity, the price 
is gradually forced down again. When prices fall, they 
discourage many producers from the field, and as their re- 
tirement gradually reduces supply, prices are driven up 
again. Hence a continuous relationship between prices 
and supply and demand prevail throughout the process 
of buying and selling. A change in any one of the factors 
affects the others ; they are interdependent ; they constantly 
influence each other. By their adjustments and alterations 
they tend to maintain a proper balance and equilibrium in 
the great institution of the modern market. 

However, just as in the cost of production theory, there 
were found to be wide differences between the costs of 
various producers so in the supply and demand theory, 
there are wide differences between the demands of various 
buyers. The demand for a new pair of shoes by a man who 
already has a half dozen pairs and by a man whose one 
and only pair is worn out, is a differing demand. The 
millionaire and the day laborer have differing degrees 
of demand for food, clothing and everything else. There 
are biiyers for whom every purchase means close pinch- 
ing, stinting, and painful stretching of every penny to 
the limit of purchasing power; and there are other 
buyers for whom purchases of the same goods are easy, 
involve little or no stinting, and are simply offhand buyings 
with a real lack of interest in the amount of the price. 
The same price may be offered by two buyers, one of whom 
has a most urgent demand for the goods, the other of whom 
could get along without the goods as well as not. The 
differing degrees of demand exist everywhere, in all lines 
of articles and services on the market. Demand is not a 
uniform, unvarying thing, — the same for everybody, every- 
where. So the question arises, which kind of demand is 
the paramount force in settling prices? Is it the demand 



Markets — Their Principles and Strategy 287 

of the buyer who can barely afford to buy the article or 
the demand of the buyer who can buy with an easy in- 
difference to the price? 

Just as in the production cost theory of prices it was 
the marginal producer, the man who could just barely 
make prices cover expenses who tended to establish price 
levels, so in the supply and demand theory of prices, it 
is the marginal buyer, the man who can just barely afford 
to buy the article, who tends to establish the price levels. 
Marginal demand is the real demand force in determining 
prices. The best point of view from which to grasp the 
significance of marginal demand is that of the seller him- 
self as he maps out a selling plan. His mind works through 
some such process as this : * ' I want to place 100,000 pieces 
of this commodity on the market. Suppose I put the price 
at one dollar per piece. I am afraid that some people would 
find that price too high. I probably wouldn't sell more 
than 50,000 pieces. There must be 50,000 more people who 
would like to buy this thing, but who will say to them- 
selves, ''Well, we can't afford to pay a dollar for that 
article. We should like to buy it but at that price we 
can't quite afford it. Of course it's all right for those 
who have the money and who want to pay the price, but 
not for us." Then the seller who is mapping out his sell- 
ing campaign would reflect further: ''I will offer the arti- 
cle at ninety cents. Will that draw another 50,000 buyers ? 
I am afraid not. It will draw perhaps 30,000 buyers ad- 
ditional, but it will not sell the full 100,000 pieces. I must 
catch the eye of that lower 20,000 in order to sell all that 
I want to sell. That group at the bottom of the ladder is 
the hard group to persuade to buy; and they seem still to 
think they can't afford to buy, even at 90 cents. Suppose 
I reduce the price to 80 cents, I believe that price will tempt 
them to part with their money. I will offer the full hun- 
dred thousand at 80 cents per piece." 

From many standpoints it seems unfair to the seller to 
force him to put his price down to the point where he can 
induce the most unwilling buyers to purchase goods. Thou- 
sands of buyers would pay more, probably without com- 



288 Markets — Their Principles and Strategy 

plaint, but other thousands would not buy at all if the 
price were any higher. So the most reluctant buyer, the 
most unwilling consumer, the man of marginal demand, 
sets the price level for the goods. He is the man at the 
end of the line, the man who can hardly persuade himself 
to buy even at the price calculated to catch him. He is 
the man for whom the question — to buy or not to buy — 
is a poser, who is tottering on the margin of doubt and 
skepticism. The price for all has to be set at a level which 
will catch this marginal group. Of course, if the imaginary 
seller above wanted to sell 150,000 pieces of the commod- 
ity, he would fix his price still lower to catch a still lower 
marginal buyer 

The marginal buyers as we have seen are the men who 
at the price prevailing, can just barely be persuaded to 
buy. Each price level, therefore, has its own grade of 
marginal buyers, each price level has its own fringe of 
buyers Whose demand is a marginal demand. Above this 
marginal fringe of buyers, there are other buyers who could 
well afford to pay more. But they do not have to pay more 
because if prices were raised the marginal fringe of buyers 
at the lower level would drop out of the market entirely 
and the sellers would be able to market only a fraction of 
their goods at the higher prices. The marginal fringe of 
buyers occupies the strategic position in the demand force 
and bends prices to their state of mind. Prices must bow 
to the whims and wishes of the most reluctant buyers. It 
must not be understood that the marginal fringe of buyers, 
or any of the buyers above the margin for that matter, are 
acting usually from careful rational analysis of all factors 
in the case. They are in large measure the victims of 
custom, habit, imitation, suggestion, and tradition. Their 
minds are influenced by social convention, ingenious ad- 
vertisement, clever salesmanship ; and their decisions are 
probably more often non-rational than rational. But, by 
whatever psychological process, good or bad, they reach 
a decision to buy or not to buy, that decision is the deter- 
mining force in the price scale. To go behind the mere fact 
of demand ; to go beneath the fact that the decision to buy 



Markets — Their Principles and Strategy 289 

has been made and to inquire into the reasons why demand 
is thus and so; to examine the psychology of the decision 
to buy, leads to an analysis of social and individual psy- 
chology and of the market as a social institution. An 
analysis of this phase of the market problem will be made 
later in this section.^ 

There are then two conceptions of the origin of prices, — 
the cost of supply theory and the marginal demand theory. 
The two theories are not incompatible or contradictory, 
but are supplementary. The cost of supply theory ac- 
counts mainly for the minimum below which prices cannot 
for any length of time be allowed to fall ; and the marginal 
demand theory laccounts for the maximum above which 
prices cannot for any length of time be allowed to rise. 
The two theories account for the upper and lower limits 
of price levels. If prices fall below the lower limits set 
by the marginal costs of supply, they cause losses to the 
marginal producers and drive them out of business. If 
prices rise above the upper limits set by the marginal 
group of buyers, the marginal buyers cannot afford to 
buy and producers cannot dispose of their goods. Mar- 
ginal cost of supply determines the rock bottom below 
which prices cannot drop; marginal demand determines 
the peak above which prices cannot soar. 

But this relation of the two fundamental price theories 
should not induce anyone to suppose that either marginal 
cost or marginal demand are absolute and fixed points. 
Marginal producers and marginal buyers are marginal only 
in reference to a given price level. A higher price level 
brings in a new group of marginal producers even worse 
in the scale of inefficiency and heavy costs. Likewise a 
higher price level brings in a group of marginal buyers yet 
worse off in the scale of ability and willingness to buy. 
Lower price levels eliminate the old marginal producers 
and buyers, and bring in new ones at the new levels. Mar- 
ginal cost under any price level covers the fringe of mar- 
ginal producers who can just survive under that level. It 
is their minimum of subsistence price. And marginal de- 
1 See pp. 346-364. 



290 Markets — Their Principles and Strategy 

mand under any price level covers the fringe of marginal 
buyers who can just afford to buy at that level. It is their 
"last straw" price, the utmost they can afford to pay, — any 
more and they would be out of the market. So changes in 
price levels bring corresponding changes in the grades of 
marginal producers and of marginal buyers. And the 
grades of marginal producers and marginal buyers at each 
level tend to keep the range of prices of that level within 
the upper and lower limits which enable the marginal 
groups to keep going. The marginal groups, on both sides, 
tend to set the minimum and maximum limits of prices. 
It very frequently happens that the cost of supply rises 
to such a point that it threatens to exceed the upper limit 
set by demand. At such a time, producers who are fa- 
miliar with the market realize that sooner or later the ex- 
cessive costs will run prices up so high that marginal buyers 
will be driven from the market, demand will fall off, and 
it will be impossible to dispose of the supply at a price 
adequate to meet the cost of production. In that event, 
the producer faces the obligation of cheapening production. 
As a matter of fact, this necessity of cheapening the costs 
of supply is what compels producers and sellers to exhaust 
their ingenuity and inventiveness. Costs must be cut. It 
is an imperative necessity, — that or failure. Goods can- 
not be sold in adequate quantities above certain prices, and 
costs must be pared down to make those prices possible. 
Under this compulsion a wide range of economic move- 
ments has arisen and has played a most important role 
in economic activity. The chief reason for the movement 
toward combination in industry was the necessity for elim- 
inating the excessive costs of cutthroat competition. For 
the purpose of lowering costs leading producers maintain 
staffs of scientists, inventors and research experts, whose 
time and effort are devoted to the discovery of ways of 
eliminating waste, reducing expense, introducing econo- 
mies, improving efficiency. New inventions, automatic ma- 
chinery, standardized production, scientific management, 
personnel administration, ef&ciency systems, — all these and 
other similar efforts are encouraged for the sake of keeping 



Markets — Their Principles and Strategy 291 

costs low. Producers are between tiie upper and lower 
millstones of costs and prices and are squeezed to death 
unless they keep costs at safe levels. Marginal producers 
are those who find it impossible to benefit from improved 
and cheapened methods of production as greatly as do 
their fellow producers. Those who can reduce costs suc- 
cessfully make profits ; those who cannot, live on the margin 
and barely make ends meet. 

The devices for holding down the cost of supply are of 
many kinds. Not a few producers do it by making goods 
of an inferior quality. From the consumer's viewpoint, 
this practice is vicious. Producers enter into the practice 
widely nevertheless in the determination, at all hazards, to 
cheapen production costs. A very large item in cost of 
supply is the cost of capital tied up in merchandise. 
''Small capital, with rapid turnover of goods, is the best 
means of securing merchandising success," declares an 
authority on marketing.^ Chain stores are a recent in- 
novation in marketing and are designed to take particular 
advantage of quick turnover of capital. It is estimated, 
for example, that chain drug stores turn their stock over 
three times as rapidly as independent drug stores, and 
that chain tobacco stores or grocery stores have fully as 
high a ratio over independent stores in those fields. By 
rapid turnover of goods, chain stores make one dollar of capi- 
tal do the work formerly requiring three dollars, and there- 
by reduce the costs of marketing materially.^ Approximately 
25,000 stores are already organized in chain systems.^ 

The reduction of costs to proper levels is in large meas- 
ure a problem in cost accounting. No storekeeper, whole- 
saler or manufacturer is in a position to reduce costs until 
he knows what his costs are. He must know not merely 
what his general total costs amount to; he most know the 
unit cost of each process of his business, of each part and 
each stage. Cost accounting has, until very recent years, 
been neglected by both manufacturers and distributors. 

iC. S, Duncan, "Marketing," p. 464. 

2 P. W, Ivey, "Principles of Marketing," pp. 79-80, 236-240. 

sNystrom, "Economics of Retailing," pp. 216-217. 



292 Markets — Their Principles and Strategy 

Investigations by the Federal Trade Commission and by 
the Harvard Bureau of Business Research before the war 
disclosed the fact that neither manufacturers nor retailers, 
on the average, had other than the most primitive con- 
ception of the cost of doing business. Under the stimulus 
of these and other agencies, much has been done to bring 
about uniform cost accounting methods. Cost accounting 
shows which phases of the business result in loss and which 
phases result in profit. It shows the general state of pros- 
perity of the business. Bankers demand to know in terms 
of accounting statistics the general state of the business 
before loans will be extended. The whole price policy of 
a corporation rests upon proper accounting. In actual 
business practice, price is not set by considering cost first, 
but by estimating the demand possible at the price calcu- 
lated. Then costs must be cut to make the price feasible.^ 

By whatever device costs are cheapened, the strategy of 
cost control is of primary concern. The entire group of 
manufacturers, food growers, railroad operators, whole- 
salers, jobbers, retailers and others who figure in the cost 
of supply of commodities play a part in the strategy of 
manipulating costs of selling in such a way as to make a 
profit. All groups engaged in production and distribution 
are looking for profits; and profits are measured by the 
margin or spread between costs and selling prices. The 
wider the spread between costs and selling prices at each 
stage of the process, the larger the profit. The safest and 
most serviceable way of making the spread wide and the 
profit great is to reduce costs of making and selling 
goods to the lowest point possible. Into this strategy every 
manufacturer and every merchantman is pressed to throw 
his best energy if he is to be thoroughly successful. The 
tactics of reducing the cost of supply are thus of the utmost 
self-interest to business men who are anxious for profits 
and at the same time of the utmost service to consumers 
who are in need of goods of moderate price. 

To make the significance of a control of cost fully clear, 
it is necessary to give further illustration of the methods 
iSee A. W. Shaw, "Approach to Business Problems," p. 252. 



Markets — Their Piinciples and Strategy 293 

involved. The devices for the restriction of costs are of too 
many varieties to receive detailed description here, but a 
few prominent examples may be taken up to advantage. 
The costs of making and marketing a very large number 
of articles are lowered by undertaking the processes on a 
large scale. Quantity production commonly means cheap- 
ened production. If a large enough demand can be found 
or created to absorb the full product of a large, efficient 
factory, utilizing automatic machinery and standardized 
production methods, and operating near maximum capac- 
ity the year around, the cost of making each unit of prod- 
uct is substantially lessened. Production policies and 
market policies are in this respect, as in many others, very 
closely correlated. 

Another conspicuous development of recent years in the 
direction of controlling the costs of making and marketing 
goods has been the tendency to eliminate the middleman in 
many branches of distribution. Integration in business 
organization has been one phase of this tendency. The 
United States Steel Corporation, as an illustration, mines 
coal and iron for the uses of the company mills, owns ships 
and railroads, and in addition to directing the manufacture 
of steel products, regulates in considerable measure the 
machinery of distribution of steel products to steel users. 
Another phase of the elimination of middlemen has been 
the policy of direct selling by the producer to the con- 
sumer. In limited forms, co-operative agencies of distri- 
bution have sprung up to eliminate the middleman, and on 
a surprisingly large scale the mail order business has 
worked in the same direction. In some lines of commod- 
ities the effort has been to drive out the wholesaler, and 
to enable the manufacturer or producer to deal directly 
with the retailer. In other commodities, the effort has been 
to drive out the retailer as well. This whole tendency to 
attack the middleman has arisen partly from the impres- 
sion among consumers that many middlemen are gougers 
and profiteers and partly from the desire of producers to 
meet the needs of the market for reduced costs of distri- 
bution. Those who have been engaged in the elimination 



294 Markets — Their Principles and Strategy 

of the middleman have, however, very commonly made the 
discovery that the functions which the old middleman per- 
formed were indispensable functions, and that once the 
old middleman is eliminated, new marketing machinery has 
to be created to perform those functions. The result is 
that whereas there has been a movement in many lines 
to drive out the middleman, the substitutes newly created 
to perform the same functions have themselves been so 
expensive that marketing, on the whole, has not become 
less expensive. 

A more significant tendency in the direction of con- 
trolling costs has been the effort of middlemen to perform 
the essential functions of marketing more efficiently, intel- 
ligently and economically. The keeping of standardized cost 
accounts has worked in the direction of better planning and 
more efficient organization of distributive channels. Plans 
for reducing the cost of delivery from retailer to consumer, 
for safer and cheaper storage of goods, for proper insur- 
ance, for careful control of rent and interest charges in 
the business, for scientific advertising, for scientific sales 
management, — plans along these and many other lines 
seek to perform the same indispensable functions of mar- 
keting in a more scientific and efficient manner. They 
are sounder economic developments than the illusion about 
eliminating the middleman outright. 

It is well at this point to emphasize the fact that the 
attempts of producers and distributors to hold costs down 
are not usually guided by pure reason, unfettered by bias, 
prejudice or inertia. On the contrary, the producers and 
distributors all along the line are hampered by countless 
traditions, customs, and habits. Manufacturers, whole- 
salers and retailers are alike reluctant to break away from 
the business methods of their fathers, and habit, instinct, 
and unconscious social conservatism play just about the 
same dominating role here as in any other social structure. 
Any number of manufacturers in the garment trades were 
unwilling to introduce new machinery which would greatly 
cheapen the cost of manufacturing clothing until mini- 
mum wage laws forced them to do so in order to reduce 



Markets — Their Principles and Strategy 295 

costs to a point which would make profits possible at the 
new wage levels. They were content to go along under 
sweatshop conditions until they were virtually compelled 
to adopt improved methods. The coal industry exemplifies 
in numerous ways the damaging force of tradition and 
inertia as deterrents to the adoption of advanced and 
scientific methods of coal production and distribution. En- 
gineers are practically agreed that more than 100,000 
workers are employed annually in coal mining that would 
be unnecessary under a proper management of the indus- 
try. Engineers also point out that although American 
mines use machinery to a much larger extent than most 
foreign mines, nevertheless about one-half the annual coal 
production of American mines is still dug out without 
the aid of modern mining machinery. Moreover, in typi- 
cal mines, fully 85 per cent, of the labor cost of getting 
out a ton of coal is devoted to the cost of shovelling 
coal by hand. Modern machinery could do the same 
shovelling at about one-fifth of the present cost, but mine 
operators fail to take advantage of it.^ These illustra- 
tions suggest the force of tradition, conservatism and habit 
in the determination of production costs. The marketing 
institutions of the country are held back by these uncon- 
scious factors in shaping the policies of business men. The 
general run of business men are often slow to admit the 
advantages of advances in efficient means of making and 
marketing goods, because of the binding force of the time- 
honored practices of the past. Hence the spread of new 
inventions is. often slow, and the adoption of improved 
methods of management comes only as a very gradual 
breaking away from hard and fixed habits. 

To summarize the theory of prices from the supply side, 
the cost of production in all its stages from the raw prod- 
ucts of the earth to the finished goods of the consumer 
contributes toward establishing that minimum below which 
prices ' cannot for any length of time be allowed to fall. 
A fall below the cost minimum would drive out of business 

1 A. J. Mason, American Economic Review Sup., March, 1921, 
pp. 107-109. 



296 Markets — Their Principles and Strategy 

the producers whose costs are highest, the producers at the 
margin, and would therefore reduce the supply accord- 
ingly." But when costs for everybody can be considerably 
reduced, then it is possible for prices to be lowered ac- 
cordingly, without killing marginal producers. At lower 
costs and lower prices a greater supply is likely to be 
thrown on the market, more people can afford to enjoy 
the consumption of the goods affected, and a new rela- 
tionship between marginal cost and marginal demand is 
set up. 

The Analysis and Creation of Demand 

The purposes of an analysis of demand are not merely 
to understand the facts of demand as they exist at any one 
point of time, but also to understand the means by which 
changes in demand take place. It is necessary to know 
what present demand is in order that business men and 
consumers may adapt themselves to it and comply with 
its conditions. But the demand of the present is the product 
of history, it is the result of innumerable changes in human 
institutions and social psychology in the past, and it is 
steadily in a process of evolution and transformation. By 
devices of one sort and another, demand can be deliberately 
created in one direction and destroyed in another. Demand 
is not a fixed and inexorable state of mind, but for each 
commodity on the market, demand has a history and a 
future, and is always a changing, moving force. 

The complete analysis of demand would be a compre- 
hensive task, and the chief factors in it cannot here be 
treated at any length. However, the central feature of 
such an analysis may be given in a condensed form. Some 
goods, — such necessities as food and clothing, — have a uni- 
versal demand among all classes of people, but different 
classes of people will desire different grades and brands 
of food and different qualities and styles of clothes. Other 
commodities, particularly luxuries and comforts, cater to 
particular groups and classes of consumers. M. T. Cope- 
land describes the task of demand analysis among social 
classes as follows, "Some of the considerations to be 



Market s-^Tlwir Principles and Strategy 297 

taken into account in this analysis are M^Iiether the product 
is for individual or family use, the age and sex of the users, 
rural or urban demand, the occupation of the users, racial 
influences, living conditions such as home ownership, the 
influence of climatic conditions, provincialisms in demand 
such as the demand for left-hand plows in some districts, 
or the 'yokel' trade in clothing, and the influence of cus- 
tom."^ Demand analysis is considered as of the utmost 
importance by the successful merchants and dealers whose 
special economic function is buying and selling. The force 
of custom in the buying habits of each class or group of 
prospective customers, and the prevailing peculiarities, 
notions and eccentricities will need attention. The geo- 
graphical location of classes and the distribution of popu- 
lation, the history of the demand for each individual com- 
modity, the purchasing power and the amount of income of 
prospective buyers, the standards of living, the buying 
motives, — all of these factors along with many others re- 
quire careful analysis from anyone who plans to put goods 
on the market intelligently and profitably.^ Once the cold 
facts of demand are understood, the merchant is in a 
position to adapt his buying and selling to its terms. He 
is equipped with information which should enable him 
to modify his business policies in ways which insure that 
they will fit the needs of the case. 

But the modern producer of goods to sell, and the mod- 
ern wholesaler or retailer, makes a further use of demand 
analysis. He views demand as something which can be 
altered by deliberate manipulation. If there are goods 
which he wants to sell, and he finds no interest among the 
people, no demand from the public, he sets out to create 
a demand. Demand is not something to be accepted as 
in all respects inevitable, but as something to be shaped, 
guided, and controlled. Some of the main policies for de- 
mand control will be treated under the following heads: 
(1) plant policy, (2) style of product, (3) service features, 
(4) advertising, (5) sales management. 

1 "Marketing Problems," pp. 3-5. 

2 Duncan, "Marketing," Cliapter XIV. 



298 Markets — Their Principles and Strategy 

Plant Policy 

The policy of locating the plant near the chief market 
centers for any particular commodity as a means of holding 
a conspicuous place in the eyes of buyers is frequent. The 
decision to locate a store on Fifth Avenue or on a back 
street is important. Whether to keep the sales department 
and the production plant in the same locality, or to sepa- 
rate them for purposes of sales strategy is often a vital 
issue. The type of plant to erect for purposes of showing 
off to visitors is a matter of concern. The use of the most 
modern machinery may, when it becomes widespread knowl- 
edge, stimulate demand. In brief, the location of the plant, 
and its whole process of production, has definite relations 
to the strategy of creating demand. 

Style of Product 

The manufacturer, and often the retailer, have to decide 
whether to offer a certain commodity in bulk or in pack- 
ages. The fineness of quality must be decided upon. The 
color and shape and style of the commodity will all influ- 
ence demand. Whether to emphasize beauty of construc- 
tion or durability will be a problem. Size of commodity 
units, methods of wrapping, standardization of quality and 
appearance, form of brand or trade mark, — these are but 
a few of the considerations which enter into demand crea- 
tion for the product. The satisfaction which consumers 
find in the use of an article, and the appeal which it makes 
to their minds or to their whims, determine whether they 
will want to buy again and whether they will advise their 
friends and neighbors to buy. A distinct tendency in 
recent years has been to prepare articles in attractive pack- 
ages, cans, containers or wrappings. Even though some 
addition is made to the price, the public appears willing 
to pay the extra amount for the satisfaction of having 
goods in sanitary condition, or of standardized quality, 
or of attractive appearance. 

Service Features 

"The service which properly should accompany a sale 
is frequently of larger psychological importance to a cus- 



Markets — Tlieir Principles and Strategy 299 

tomer than the merchandise itself. ' '^ A popular feature of 
department stores is the service accommodations in the form 
of rest rooms, writing facilities, musical entertainment, and 
restaurant accommodations. When a person buys an electric 
washing machine, or an automobile, or a gas range, it is 
of the utmost importance that the buyer shall not merely 
receive the article, but that he shall be shown how to 
operate it, that services shall always be readily available 
for repairs, that if at any time the buyer experiences 
trouble in using the article, the services of the seller or 
manufacturer shall be available to aid him in correcting 
the difficulty. The courtesy of the company in render- 
ing such services, and its ability to make the customer 
feel that he has been excellently and helpfully treated 
throughout the transaction have results measured in the 
good will of the customers and an increased demand for the 
article. 

Advertising 

What a buyer wants is largely a matter of his psychol- 
ogy, and advertising is a policy of creating wants and de- 
sires by the application of psychological principles to the 
ways of the market. "Psychology, the modern world has 
learnt, is the chief factor in salesmanship. . . . How to 
create a market . . . how to emphasize points of difference 
or superiority between one's own goods and those of com- 
petitors, how to create new vogues — ^those are the difficul- 
ties that need the greatest ingenuity to overcome."^ The 
annual expenditure of the United States for advertising 
is put at about $1,300,000,000. This gigantic expense is 
held by business men to be worth while because it creates 
demand and sells goods which could not otherwise be dis- 
posed of at so profitable a selling price. The strategy of 
creating demand has developed a technique of its own, 
also a body of economic and psychological principles. And 
so great have become the intricacies of the technique and 

1 J. G. Frederick, "The Great Game of Business," p. 78. 

2 C. F. Higham, "Scientific Distribution," pp. 42-105. 



300 Markets — Thew Principles and Strategy 

the principles, that advertising, at its best, requires special- 
ists and experts in that field. Large corporations usually 
maintain advertising departments, and the economic com- 
munity is flooded with special companies which devote 
their energies exclusively to the handling of advertising 
for business concerns who have something to sell. 

Advertising psychology involves an appeal to the domi- 
nant human instincts. As explained by H. L. HoUing- 
worth, "From the point of view of the advertiser, the im- 
portant thing is if an appeal can but touch off one of these 
instinct mechanisms it is sure of at once possessing atten- 
tion, power, interest, imagery, association and memory 
value, and is extremely likely to set up strong response. 
And the more universal the instinct, the greater the like- 
lihood of its effectiveness. . . . Twenty years ago adver- 
tisements failed to recognize the specific character of in- 
stincts; appeals tended to be of a vague, generalized sort 
which in our day would pass unobserved by a busy public. 
But the present practice is more and more to recognize 
the specific instinct as a basis of appeal, and to concen- 
trate the appeal strongly on a single instinct rather than 
to distribute it among many."^ Advertising attempts to 
guide the instinct wants of men along desired channels by 
observing the psychological laws of catching and holding 
attention, of the association of ideas, of attracting and sus- 
taining interest, of imagery and sense stimulus, of habit, 
imitation, sympathy and suggestion. The greater part of 
advertising does not present a chain of reasoning, a mass of 
logic, or a fund of evidence and proof. It works upon the 
instinctive and emotional nature of people by the process 
of suggestion. This view of human nature is a primary 
faith in the mind of the advertising expert. "While tradi- 
tion regarded man as wholly logical, the modern concep- 
tion, as already intimated, makes him largely a creature of 
suggestion, Man has been called the reasoning animal, but 
he could with greater truthfulness be called the creature 
of suggestion. He is reasonable, but he is to a greater ex- 

1 H. L. Hollingworth, "Advertising and Selling," pp. 239-240. 
See, also, pp. 284-285, 



Markets — Their Principles and Strategy 301 

tent suggestible."^ By properly putting certain pictures 
and statements about a commodity before the eyes of the 
public, and by repeating the picture, or a catch phrase or 
a selling point hundreds and thousands of times, the ad- 
vertiser is able to crystallize in the mind of the buying 
public a spontaneous desire to buy. The new want has 
the force of demand in the market, and is a genuine 
influence in determining price factors and the relation- 
ships of supply and demand. 

The media for creating this new demand are various. 
Newspapers, magazines, house organs, company bulletins, 
circular letters, electric signs, billboards, posters, street- 
ear cards, window displays, catalogs, souvenirs, — such are 
some of the main channels for circulating the advertis- 
ing appeal. Each medium has special advantages for 
certain forms of advertising and certain forms of goods. 
The relative advantage of each form and the relative 
effectiveness of different kinds of advertising copy are 
not left to mere guesswork, but in the larger advertising 
adventures they are determined by carefully arranged 
experiments, psychological tests, and devices for measure- 
ment of the amount of buying power created. Quantity 
measurement of psychological results is relied upon. 

The broad social effects of advertising are two-sided. 
Many of the wants created by advertisers divert purchas- 
ing power toward goods which are of high use and service 
to consumers. But it is equally true that not infrequently 
advertising is used to catch the desire of the masses of peo- 
ple, and to lead them to pour their purchasing power 
into showy packages, gilded baubles, and inferior commod- 
ities. Under the spell of advertising new wants spring up 
without the consumer 's realizing whence they came or why. 
The housewife who, because of advertising, has been won 
over to the practice of buying household supplies in pack- 
ages, usually secures a better quality of goods than when 
she bought in bulk. But "if she buys standardized goods 

1 Walter D. Scott, "The Theory and Practice of Advertising," 
Chapters IV and XIV. 

See, also, Scott, "Influencing Men in Business," 



302 Markets — Their Principles and Strategy 

in standardized packages, she will usually pay from 50 to 
100 per cent, more than she would if she bought in bulk 
and did her own inspecting and selecting."^ It is true, 
too, that although here and there advertising has caused 
lavish and wasteful expenditure, nevertheless "advertise- 
ments have made household words of the names and trade 
marks of all the best commodities. ' ' And it is noteworthy 
that "the theme upon which all advertising harps is ex- 
cellence in some shape or form, serviceableness, or good 
design, or comfort, or utility or beauty."^ The policy 
of advertising has raised the general standards of consump- 
tion in terms of cleanliness, quality, sanitary features, and 
artistic appearance. Hence, although there is both whole- 
some advertising and vulgar advertising, the preponderant 
effect of a decade of intensive advertising is in the direc- 
tion of higher standards of demand and a more versatile, 
though often extravagant, consumption. The most hopeful 
means of eliminating vulgar and unsocial demand is not 
to eliminate advertising, but to raise the standards of ad- 
vertising, morally, socially and artistically. Fortunately, 
the most powerful advertising concerns in the country are 
exerting their influence steadily toward that goal. 

Sales Management 

The conditions of the market require that a corporation 
carefully organize the selling end of its activities with a 
view to bringing together all of the factors which affect 
sales and demand into a single, smoothly working unit. 
The typical modern corporation maintains a sales depart- 
ment, which helps to correlate production with sales, and 
integrates all of the separate parts of sales strategy into 
a scientific selling organization. A major function of any 
sales department is to make people want to buy goods. 
To this end, the sales manager and all those under him 
take the aggressive in a campaign to create an adequate 
demand. The measure of success for sales management is 
the volume of sales. Sales come about, not by waiting for 

1 T. N. Carver, "Principles of Political Economy," p. 205. 
2C. F. Higham, "Scientific Distribution," pp. 54-61. 



Markets — Their Principles and Strategy 303 

consumers to hunt out the stores and factories and to 
go in search for goods, but by going out into the market 
and hunting out consumers, and persuading them to buy 
the goods. No sales manager would in normal times think 
that he had begun to perform his duty if he pursued a 
policy of watchful waiting for customers to come to him to 
buy. It is his duty to put the suggestion into the minds 
of possible buyers, to bring to bear on them the full force 
of the personality of trained salesmen, in short, to create 
sales. 

There are salesmen of raw material to manufacturers; 
of manufactured material to dealers, jobbers, wholesalers; 
of machinery to producers; of finished goods to retailers; 
and of retailers' stocks to final consumers. More and 
more, good salesmanship all along the line is being consid- 
ered an indispensable economic factor. More care is being 
paid to the selection of salesmen, and scientific tests and 
intelligence tests are being extended as a means of selecting 
men who have the most native ability in persuading peo- 
ple. Psychological qualities of persistence, force of per- 
sonality, initiative, alertness, sociability, and aggressiveness 
are at a premium in salesmanship. Native aptitude for 
selling is not however all that the salesman needs. He 
must receive also a training in the technique of selling. 
Large corporations maintain training schools in which 
they drill and educate their salesmen in the science of gen- 
eral selling principles and in the art of selling the particu- 
lar commodity or service of that corporation. From time 
to time, salesmen are brought together in conventions, and 
are inspired and instructed by lectures, charts, pictures 
and conferences. In addition to training salesmen, mod- 
ern corporations surround them with incentives to maxi- 
mum selling effort by the use of prizes, bonuses, quotas, and 
contests. Instincts of rivalry, display, or pugnacity are 
strongly aroused; financial incentives are vigorously en- 
couraged ; the desire for power and successful achievement 
is sustained by the ever-present expectancy that when a 
salesman makes good consistently, he will receive promo- 
tions and salary increases. In most lines of salesmanship, 



304. Markets — Their Pri7iciples and Strategy 

the financial rewards of hard and successful work are eon- 
monly higher and quicker than are the rewards for work 
requiring a similar length of apprenticeship in other 
branches of business. 

The crucial test of salesmanship is the interview with a 
prospective buyer. The salesman's task is to create de- 
mand in the potential buyer, and to convert that demand 
into an actual sale. "The creative type of salesman . . . 
is often told that the customer is not interested and does 
not see the need for the goods. The creative salesman 
then helps to educate the prospect to appreciate how he can 
profit by accepting the offering made."^ He attempts to 
approach his prospect often by indirect conversation, about 
sports if the buyer is a lover of sports, or about a hobby 
perhaps which he knows of in the buyer's make-up. He 
endeavors to observe the favorite convictions of the buyer 
and to utilize them in talking up the goods which he has 
to sell. The habits, notions, whims, prejudices and eccen- 
tricities of the prospect are sought for by the tactful 
salesman, and played upon in the interest of making the 
sale. A leading authority on salesmanship advises, ''The 
principal qualification of salesmanship is ability to close. 
. . . Watch for the point when the resistance of your pros- 
pect ceases. This is commonly called the 'psychological 
moment '. ' * Also the instructions read in such phrases as : 
"Subtly make the prospect feel," "Become politely impa- 
tient, ' ' throw out ' ' a delicate question, ' ' and take the order 
for granted.^ The sales department has justified itself 
if, by all the arts of salesmanship, it can sell the goods to 
buyers. That means arousing demand where none existed 
before, or redirecting demand into new channels, or adapt- 
ing new goods to old demands. Good salesmanship sella 
more goods than would be absorbed without aggressive 
creation of demand in these ways, and affects in the most 
profound manner the meaning of demand in the supply 
and demand equation. Demand is not something which 
comes to him who -\vaits ; demand must be coaxed and sug- 

ij. G. Frederick, "Modern Sales Management," pp. 262-268. 
2 Ibid., pp. 262-268. 



Markets — Their Principles and Strategy 305 

gested and argued and cajoled into being. It must be 
manufactured by the wit and genius of men born with 
the gift of persuasion. Only by that road is high business 
success nowadays attained.^ 

Guidance of the Ratio Between Supply and Demand 

It has already been emphasized that neither supply nor 
demand is an absolutely fixed and unalterable factor, but 
that each is subject to manipulation, strategy, habit, cus- 
tom, prejudice, and scientific guidance. It follows that 
the relationships between supply and demand are simi- 
larly subject to the tactics of ingenious guidance, and to the 
ties of blind tradition. From the beginning of produc- 
tion to the end of consumption, this process of adjustment 
is under way. As the English economist, Alfred Marshall, 
remarks, ' ' Production and marketing are parts of the single 
process of adjustment of supply to demand."^ 

This adjustment requires that producers and distribu- 
tors should forecast intelligently the possible demand. The 
bulk of goods are produced before the producers know 
for a certainty what consumers will pay for them. In other 
words, the bulk of production is based upon a scientific 
estimate as to what the demand is most likely to be. As 
Marshall says, "The constructive trader . . . aims high, 
and sees far; he is constantly forecasting future develop- 
ments of demand. ' ' ^ Smaller concerns are more apt to 
have their eyes glued to immediate contracts of sale, and 
to produce without a long-range view of the market. Such 
a branch of production as agriculture has a large element 
of climate and weather in the factors which determine its 
volume of production. But in such a branch of produc- 
tion, the middlemen, who buy the grain from the farmers, 
the speculators and the trade boards, calculate ahead and 
adjust the price in a way which relates the present or ex- 
pected crop supply to an estimated demand long in the 
future. 

1 See H. D. Kitson, "The Mind of the Buyer." 

2 "Industry and Trade," p. 181. 
»IMd., p. 47. 



306 Markets — Their Principles and Strategy 

The control of supply may take place, and very frequent- 
ly does, through the common opinion of separate business 
men in any line of industry who have access to a com- 
mon stock of market information. The community of in- 
terest which prevails among producers and distributors 
of shoes or clothing or wheat and the influence of fairly 
uniform market news upon their individual judgment, 
commonly leads to an unconscious uniformity, or near 
uniformity, of opinion as to what the future demand will 
be and what the supply should be to meet that demand. 
Uniformity of business policy in gauging the amount that 
should be produced may thus be arrived at without mo- 
nopolistic action or coUusion among the major concerns in 
a given line of industry. As one authority explains, "It 
must be made clear that control of supply is and remains 
a very different thing from monopoly, which is only an ex- 
treme form of it. Some measure of control is necessary 
in every form of production ; but control of supply to this 
degree is not always a conscious effort, it is more often 
an automatic and unconscious effort amongst a whole 
group, the stimulus to which is received by each individ- 
ual of the group separately and distinctly from the fluctua- 
tions of price in his own particular section of the mar- 
ket. "^ 

The great stabilizer of adjustments between production 
and marketing, between supply and demand, is adequate 
market news. Crop reports, production statistics, interna- 
tional trade and production figures, — these are some of the 
more immediate kinds of market news. But in the larger 
sense of the word, all news is market news. Every politi- 
cal event, every religious event, every educational event 
sets in motion waves of demand, be they large or small, 
which affect market relations. Every item of news in a 
newspaper from the first page to the last is market news, 
and significant for all those whose livelihood and fortune 
depends upon successful adjustments between supply and 
demand. A number of Government Bureaus are engaged 
constantly in supplying proper market news. The Bureau 
1 Diblee, "The Laws of Supply and Demand," p. 144. 



Markets — Their Principles and Strategy 307 

of Crop Estimates gathers statistics on the staple crops, 
corn, cotton, wheat and oats. The Bureau of Markets 
develops reports on other food products. The Bureau of 
Foreign and Domestic Commerce gives statistics bearing 
on international markets. The United States Geological 
Survey presents data having to do with mineral supplies. 
An International Agricultural Institute, with headquarters 
in Italy, gathers facts on world agricultural production.^ 
Private agencies collect statistics on all phases of the mar- 
ket, and sell the facts or give them to the market com- 
munity. All of these facilities for trade information are 
helpful in giving all parties in the market the same knowl- 
edge of facts. The Federal Reserve Board publishes regu- 
lar bulletins dealing with finance, production and trade. 
The Federal Government announces in 1921 that a greater 
unification of government news agencies is under way, and 
the projected centralization of market news facilities will 
undoubtedly work in the direction of greater harmony in 
adjusting supply to demand. 

But all such news would be of little avail were it not 
for the facilities of modern communication. Market news 
travels around the world by wireless or cable, and per- 
meates every nook and cranny of a modern country by 
virtue of the telephone and telegraph, and of the mail 
system. "Adequate overseas communication is as impor- 
tant as ships and foreign banks to successful trade. "^ 
Nothing would reduce the whole market institution to col- 
lapse or chaos quicker than a destruction of modern elec- 
tric communication. Napoleon's military dictum that 
"Time is everything" applies with equal force to market 
news. Telephone, telegraph, wireless, cable, and post of- 
fice are the controlling factors in the dissemination of mar- 
ket intelligence. Traders and producers buy and sell in 
the produce exchanges and the speculative centers with 
startling rapidity because of the flashes of news with 
which electricity supplies them. This quick and univer- 

1 See, also, Annals of the Am^ericam, Academy of Political and 
Social Science, Vol. 94, pp. 100-160. 

2 Duncan, "Marketing," p. 215. 



308 Markets — Their Principles and Strategy 

sal access to important market news enables all business 
men to base their business policies upon common knowl- 
edge. Hence market news tends to organize and stabilize 
the market along uniform and common channels. 

In the guidance of the relations between demand and 
supply, modern speculation plays a highly important part. 
The speculators are large scale buyers of products, who 
make their purchases because they have estimated that 
demand some time in the future will enable them to sell 
at a profit. The speculative community feeds out the total 
supply gradually and by small degrees, for if the whole 
supply of a commodity, wheat for instance, were thrust 
upon the market instantaneously, consumers could not take 
up the supply. Gambling, whether on the market or else- 
where, is not to be defended.^ But speculation, which 
''tends to increase the supply of things where and when 
they are likely to be most wanted, and to check the supply 
of things where and when they are likely to be in less ur- 
gent demand," is of the utmost service in keeping the 
adjustments of supply and demand gradual and smooth.^ 
Speculation which interprets market news as only shrewd 
and brilliant experts can interpret it, and buys and sells 
the country's or the world's supply of a commodity at 
times and prices which maintain a steady flow of goods 
toward the consumers who want and need them, is a 
force for equilibrium and poise in the market. Speculation 
connotes in the popular mind hazard and risk on a gigantic 
scale. It is true that speculation entails enormous risks, 
but the risks are not created by speculation. The risks 
exist already. The risks of adjusting local, national and 
world supply in any commodity to local, national, and 
world demand, exist from the very nature of the circum- 
stances.^ Speculation concentrates the risks of that adjust- 

1 In August, 1921, Congress passed a law regulating speculation 
and the exchanges. The law restricts gambling features of dealing 
in futures, restricts false market information, and aims to prevent 
market manipulation. 

2 A. Marshall, "Industry and Trade," p. 253. 

3H. C. Emery, "Speculation in the United States," p. 141. "Specu- 
lation consists in assuming the inevitable economic risks of changes 
in value." 



Markets — Their Principles and Strategy 309 

ment, but it does not create them. Take away speculation, 
and the risks would still exist. But they would be scat- 
tered, broadcasted among hundreds of thousands and mil- 
lions of people who have not the genius to shoulder the 
risks effectively. The speculator concentrates on his 
shoulders the natural risks of production and marketing, 
and is able to handle the risks efficiently because of his 
superlative genius for absorbing and interpreting market 
news, and of making forecasts, with scientific accuracy and 
on a gigantic scale, of the future market needs of the con- 
sumers of the world. The less difficult adjustments can be 
made by the interpretation of market news which the ordi- 
nary man in the market is able to make, and remarkable 
uniformity of action and judgment is arrived at in this 
commonplace way. But the greater and more intricate 
adjustments between supply and demand can be made 
smoothly only by men who are able to assimilate the vast 
amount of data on world markets and who are willing 
to shoulder the concentrated risks of speculation in the 
hope of making large profits. 

Guidance of the ratio between supply and demand 
would be impossible under the highly specialized system 
of modern production except for the storage facilities which 
have developed in recent years. Goods cannot be used as 
fast as they are produced. Huge quantities are produced 
long distances from the final consumers, and facilities must 
be available to store the goods until gradually they can 
be shipped out to buyers scattered everywhere. Food sup- 
plies, such as meats, fruits or vegetables, would perish be- 
fore they could be consumed were it not for modem re- 
frigeration and cold storage. Grain elevators are indis- 
pensable for storing the grain crop of the country until 
it is ready for the mills. Chicago alone has grain elevators 
with a capacity of about 45,000,000 bushels. Seasonal in- 
dustries require warehouse and storage facilities to carry 
their goods over from periods of surplus production to 
periods of consumption. The coal industry has a long 
period of unemployment each year primarily because stor- 
age facilities are inadequate, and if consumers fail to buy 



310 Markets— Their Principles and Strategy 

their winter supply during the summer months, the mines 
must close down during the period of slack buying. There 
are no facilities as yet for adequate storage of surplus 
production until the winter demand gains headway. "Ware- 
houses for general merchandise, cotton warehouses, wool 
warehouses, tobacco warehouses, cold storage, and stock 
rooms are all of indispensable service in the adjustment of 
supply gradually and smoothly to demand. Storage facili- 
ties enable the men in the market to level out the supply 
over a period long enough to make possible a proper adapta- 
tion to demand. Storage is as fundamental in modern mar- 
ket organization as transportation or communication. It 
performs a necessary function in the great institution of 
buying and selling, and is indissolubly related with the 
other parts of the market mechanism. 

The various agencies in guiding the ratio between supply 
and demand do not always act under free and easy com- 
petition between man and man. In fact, perfect freedom 
of competition is the exceptional rather than the typical 
fact in the market organization. In almost every branch 
of buying and selling, large or small elements of monop- 
olistic control creep in. Superior access to choice bits 
of market information may give insiders an advantage. 
Occupation of strategic centers in an industry, such as 
refrigeration in perishable products, may give the occupant 
disproportionate influence over market conditions. In each 
branch of industry, there is usually a single trader or pro- 
ducer, or small group of them, who, by dint of the struggles 
of the past, and their historic position in the industry, or 
for other reasons, loom up as major factors in that in- 
dustry. "As their position is so responsible, their con- 
trol of supply is less automatic than with small traders, 
and becomes a conscious estimating of market tendencies. 
They become the brains of the trade and to a large extent 
they fix the initial prices in any market, thereby exercising 
considerable influence."^ The trade associations in many 
branches of industry furnish an opportunity for collusion 
among certain parties, who can then exert an undue in- 
iDiblee, "Laws of Supply and Demand," pp. 145-146. 



Markets — Their Principles and Strategy 311 

fluence upon price adjustments in that trade. Then, of 
course, there exists here and there, a fairly full-fledged 
monopoly, under which men hoard foodstuffs in order to 
curtail supply and force prices up, or corner a commodity, 
or restrict output, or discriminate unfairly against out- 
siders. In many forms and degrees, monopolistic control 
tends to find some place in the market organization. Hence 
it is illusory to base a study of the market upon the funda- 
mental assumption of free competition. Imperfect com- 
petition is the rule, and freedom from any sign or degree 
of monopolistic interest is the exception. 

Variations from the General Principles of the Market 

The principles of market organization which have been 
outlined are not invariable quantities. They do not explain 
all market phenomena, and not infrequently market ten- 
dencies appear which seem to indicate directly the opposite 
of the general ruling principles. Generally, a rising price 
will induce fewer purchases, but when the rumor is extant 
that the early increases in price are a sign that prices may 
rise still higher and probably remain there for some time 
thereafter, the effect of the rising price is likely to be an 
increased demand and larger immediate purchases. Buyers 
calculate that they would do better to buy quickly, even 
though the price has ascended, than wait in vain until 
prices have gone still higher. To take another type of case, 
retailers often find that buyers refuse to buy goods which 
are priced low, because they have the fear that low price 
means poor quality. Low price does not tend to in- 
crease demand when buyers acquire the notion that the 
low price is the sign of an article which is not worth buy- 
ing at any price. In accord with the same market psychol- 
ogy, a sharp slump in prices is apt to bring what is known 
as a glut in the market. Stocks of goods cannot then be 
sold at any price. Virtually no buying takes place, and the 
market is dead. This glut occurs in spite of lowered prices. 
Commodities may waste and decay, crops may rot on the 
ground, for no price, however small it may be, will arouse 
effective demand among potential buyers. Another type 



312 Markets — Their Principles and Strategy 

of exception to the general working of market principles 
is the well-known fact that many articles, especially new 
ones, must be put on the market at a fairly high price or 
there will be practically no demand at all. Certain brands 
of tea and tobacco, for example, are reported to have been 
tried out in the market at moderate prices and to have met 
with a negligible demand. Thereafter the same grade of 
commodity, when given a fancy name and a trade brand, 
and advertised as an aristocratic commodity, and when 
tagged with a high price, has aroused a large demand and 
brought a large volume of sales. 

Still another type of exception, and one which has the 
greatest social importance, is found in the fact that in- 
creased demand for a commodity may temporarily increase 
price, but in the long run, decrease price. This takes place 
when increased demand evokes large scale production, and 
large scale production cheapens production costs. Ameri- 
can industry has been particularly ingenious in developing 
quantity production at low unit cost. The chains of five 
and ten cent stores over the country give numerous ex- 
amples of articles which formerly sold at fifty cents or 
more, but which are now sold within the ten cent maximum 
because the stores can order them in such vast quantities 
that they can be produced cheaply by means of automatic 
machinery.^ But none of these types of exceptions occurs 
on so vast a scale as the exceptions found in the state of 
consumers' demand during the various stages of business 
cycles. During a period of prosperity, with prices rising, 
people engage in what seems at times an orgy of extrava- 
gant buying. A kind of social craze gets possession of men's 
minds, and there is a sort of herd mania to buy, buy, buy. 
People who can least afford expensive goods often become 
the extremists in the movement, and common laborers be- 
come notorious for lavish expenditure for silks and satins, 
fancy food and fancy clothes. Rising prices are no de- 
terrent. The gregarious mood buys anyhow. After such 
a storm of buying has spent itself, there is wont to occur 
what is termed often a "consumers' strike." Prices fall, 
lA. Marshall, "Industry and Trade," pp. 185-186. 



Markets — Their Principles and Strategy 313 

but people refuse to buy. The mass movement swings from 
one extreme to another. Demand shrinks in spite of falling 
prices. It is in the air. A herd impulse toward economy, 
stinting, thrift holds sway. Neither the era of extrava- 
gance nor the era of stinting is a rational phenomenon. 
The only clue to it is the gregarious instinct and the so- 
cial psychology which received treatment in the first sec- 
tion of this volume. 

The exceptions to the principles normally dominant in 
market processes are, primarily, temporary exceptions. 
They are occasional diversions, for the time being, from the 
worn and beaten paths of market laws. The fundamental 
principles of market organization are long run principles 
and pivotal principles. This explanation is necessary in 
order that students may have clearly in mind the pro- 
portions and relations between the fundamental market 
principles and the seeming exceptions to them. 

The Mechanism of the Market 

The market is an institution which involves not merely 
an underlying social psychology and a set of operating 
principles, but also a mechanism of purchase and sale. 

Some features of this mechanism have already been 
described and interpreted. Transportation, communica- 
tion, storage, credit and banking, — each of these is an in- 
dispensable part of the grand clockwork of the market 
mechanism. Take any one of these integral parts of the 
market mechanism away, and the whole construction would 
lie motionless and helpless. These particular parts of the 
market mechanism are explained elsewhere in this volume 
and there is no need to enter into further detailed descrip- 
tion of these parts of the mechanism at this point. 

Market Mechanism Geographically Considered 

Other parts of the market mechanism need, however, to 
be considered, and first of all, the mechanism may be looked 
at from a geographical viewpoint. From one geographical 
standpoint, it is useful to realize that there are local markets, 
primary markets, and terminal markets. Local markets 



314 Markets— Their Principles and Strategy 

are illustrated by the local buying agencies for farm 
products. Local stores buy part of the local product and 
sell it for local consumption. Local commission merchants 
or representatives of large dealers from central markets, 
buy the bulk of the produce and transport it where desired. 
The price paid the producer will be gauged ordinarily by 
the dealer's calculations based upon the price procurable 
in a primary market, with proper allowances for shipping 
cost and dealer's profit. The large meat packers estimate 
the price at which meat can be sold to dealers and con- 
sumers, and then figure the price which they can afford to 
offer stock raisers in each local market for their meat ani- 
mals.^ Local cotton prices paid to growers are largely 
calculated from prevailing prices on the Liverpool cotton 
market. In such commodities, the producer must look out 
for his costs as best he can. Price determination starts 
from a calculation of what the goods can be sold for in the 
big markets, and local prices in such lines "are often de- 
termined by deductions from the central market price. "^ 
Local prices of other commodities, of coal for example, 
are primarily determined by starting with the cost of 
production, and adding a certain profit. Small and in- 
dependent producers are apt to be in a position where 
they have to accept whatever price is set by large dealers. 
Their local prices are largely determined for them by out- 
siders over whom they have scant control and whose rea- 
sons for price offerings they cannot hope to understand. 

Primary markets are the concentration points for buyers 
and sellers in each particular line of goods. Chicago is a 
center of food products. "Wool markets head up in New 
York, Boston, Philadelphia, Portland and San Francisco, 
but not in Chicago. Iron and steel concentrate in such 
cities as Pittsburgh and Birmingham. Each branch of 
goods has its unique central markets where large dealers, 
wholesalers, jobbers, speculators come together and buy 
and sell in large lots. Each branch of goods has a history 

1 G. E, Putnam, Journal of Political EQOnomy, Vol. XXIX, pp. 297, 
663-675. 
3 Duncaji, "Marketing," p. 230, 



Markets — Their Principles and Strategy 315 

of its own in developing its individual market centers, and 
a set of traditions, customs, habits, and folkways clusters 
around the processes of each center. 

The terminal markets likewise vary for each separate 
type of goods, but ordinarily are located near the sea- 
board or national border. They are the great buying cen- 
ters for international traders. They have developed in cer- 
tain great trading centers through a considerable period 
of history, and can be understood in each case only in light 
of this historical background. 

The economics of market geography should also be looked 
at from the viewpoint of retailers, and thought of in terms 
of city, suburban and country districts. The great depart- 
ment stores, chain stores, and individual stores concen- 
trate in the larger cities of the country. The great centers 
where the consumers' purchasing power is spent lie in the 
shopping districts of such cities as Boston, New York, 
Philadelphia, or Chicago. Fancy styles and w'ide va- 
rieties for selection are prominent features of the shopping 
sections of the city centers. In the suburban districts and 
the rural districts, more relative prominence goes to con- 
sideration of serviceability of goods and stability of styles. 
Different occupational conditions in the various sections 
affect the kinds and quantities of goods demanded. Age 
and sex of population in various trade regions affect the 
standards of consumption. 

Market Mechanism Functionally Considered 

The market mechanism should also be considered from a 
functional standpoint.^ Varying types of market organiza- 
tion have come into being to perform certain needed func- 
tions. Wholesalers, jobbers, commission men, brokers, re- 
tailers perform functions of indispensable value, and play 
necessary parts in the whole market mechanism. Market- 
ing functions are likewise performed by bankers, transpor- 
tation companies, storage companies or insurance concerns, 
but we are here concerned particularly with interpreting 

1 See A. W. Shaw, "Some Problems in Market Distribution," 



316 Markets — Their Principles and Strategy 

the mechanism of those groups popularly known as "the 
middlemen, ' ' 

Middlemen are those people who perform buying and sell- 
ing functions in the process of getting goods from pro- 
ducers to consumers. They are specialists in purchasing 
goods from producers or owners, and in distributing them 
toward the consumer. The bridge between producers and 
consumers is often a long one, and the risks of crossing it 
are many. Middlemen take the risks and control goods 
in the journey from maker to user, for the purpose of mak- 
ing a profit. A wholesaler buys large lots of commodities, 
usually from a variety of producers. He collects goods 
from scattered sources, and in turn sells them to other 
middlemen nearer to consumers. A producer of grocery 
products may have no facilities for getting his products 
into the hands of hundreds of thousands of retailers the 
country over. The wholesaler, however, has built up an 
organization for that specific purpose, and so when he buys 
the grocery products from the producer and distributes 
them to the multitudinous retail stores of the country 
through a trained sales force, he helps the producer to land 
his goods in the final market, and he helps the consumer 
to procure the goods produced by the remote and unknown 
manufacturer. Because of his middle position, the whole- 
saler is in a position to analyze carefully the output and 
capacity of producers, and the wants and demands of con- 
sumers. He is in control of the mechanism which harmo- 
nizes makers and users of goods. A typical retail grocery 
store, carrying in the neighborhood of 1000 brands of 
goods, stands in need of a wholesale dealer who carries, 
through a single office, orders for practically any of the 
thousand different brands. The wholesaler buys these 
many brands from scores and hundreds of producers, as- 
sembles them, develops suitable storage facilities, sorts, 
grades or packs them, and provides a suitable selling ma- 
chinery for placing them in the hands of the retailers of 
the country. 

Although this in general states the ordinary mechanism 
of getting goods from producers to consumers, there are 



Markets — Their Principles and Strategy 317 

several important variations. Many manufacturers prefer 
to ignore outside middlemen entirely and to dispose of their 
goods direct to the retailers. Some manufacturers establish 
their own retail stores, and dispose of part or all of their 
products through these company-controlled stores. A few 
manufacturers attempt to eliminate both wholesaler and 
retailer and sell direct to the consumer. Some retailers, 
such as department stores, prefer commonly to buy direct 
from the manufacturer in large lots. The mechanism varies 
widely with each separate line of goods. For instance, it 
is estimated that about 75 per cent, of all furniture is sold 
by the manufacturer direct to the retailer, whereas about 
90 per cent, of groceries go through the wholesalers' chan- 
nels.^ Each branch of industry has a distributive mechan- 
ism, with many individual peculiarities which have grown 
up over a considerable period of history, and these peculi- 
arities of each branch are just as important to note as the 
fundamental common characteristics of the market mech- 
anism in general. 

Within recent years, new mechanisms for retailing have 
grown into prominence. Department stores, chain stores, 
and mail order stores are the chief types of these new re- 
tailers. The economies of buying goods in large lots direct 
from manufacturers give these new type retailers some- 
thing of an advantage in competition with ordinary retail- 
ers. The use of extensive advertising, of standardized 
goods, of rapid turnover, and of scientific principles of 
management has enabled these new types of retail mech- 
anism to win a secure footing in the competitive field. 

In the gap between producers and consumers, the mech- 
anism of organized exchanges has come to be of vital im- 
portance. Produce exchanges provide open trading places 
for perishable provisions such as vegetables, fruits, butter, 
eggs or poultry. Grain exchanges provide similar trading 
opportunities for corn, oats, wheat, rye, hay and the like. 
Special exchanges are maintained for cotton and for coffee 
and for sugar. To these exchanges come special buyers and 

1 See, for further illustration, Nystrom, "Economics of Retail- 
ing," pp. 36-40. 



318 Markets — Their Principles and Strategy 

traders who are experts in market information, and who 
buy and sell largely on the basis of their scientific or per- 
sonal guesses as to what the future prices will be. The 
conditions of the exchange are regulated and supervised, 
and buyers and sellers of large quantities of products can 
come together to match their best judgments on the ques- 
tion of the future course of prices. Because the dealers on 
the exchanges are specialists and experts, they bring to 
bear in the most intelligent way the forces of supply and 
demand, and the prices prevailing on the exchanges are or- 
dinarily the best indicators of the shrewdest judgment of 
competent minds on the future relations between supply 
and demand. The risk that the judgment of traders will 
turn out to be wrong introduces a strong speculative ele- 
ment into their activities, but this very speculative element 
tends to steady prices by concentrating the risks of the 
market in the hands of those most able to interpret them 
and to bear their responsibilities and dangers.^ 

Price Movements in Various Stages of the Market 
Process 

The prices of the market are unstable matters, and their 
fluctuations occur in different degrees and at different 
speeds in the various parts of the market mechanism. Retail 
prices fluctuate more slowly and less violently than whole- 
sale prices. During a period of prosperity, wholesale prices 
rise earlier and faster and higher than retail prices; and 
during a period of depression and falling prices, wholesale 
prices fall earlier, and faster, and lower than retail prices. 
Moreover, prices of raw materials and of producers' goods 
in the wholesale market tend to fluctuate more sharply than 
do the prices of consumers' goods. In general, the reason 
for these broad differences in price movements is found in 
the fact that producers and wholesalers are more sensitive 
to changing conditions of supply and demand, are more 
immediately in touch with market information, and are 
quick to act in line with that information; whereas con- 
sumers are slow to realize changed conditions of supply and 
iSee S. S. Huebner, "Annals," XXXVIII, No. 2, pp. 321-341. 



Markets — TJieir Principles and Strategy 319 

demand, and are influenced in the prices which they are 
willing to pay more by custom, habit, and inertia, A 
further explanation is found in the fact that a retailer's 
stock of goods, if bought just before a fall in prices on the 
wholesale market, must be sold at a price which will allow 
him a profit. The retailer must figure on the basis, not of 
what he could buy the goods for now at the fallen whole- 
sale prices, but on the basis of what he paid for them at the 
high level previously prevailing. This one-stage remove 
from the wholesaler makes it natural that the retailer's 
prices should follow rather than lead those of the whole- 
saler.^ This tendency of retail prices to lag behind whole- 
sale prices has been clearly illustrated in the price fall of 
1920-1921, Official reports of the Federal Government 
have made it evident that in any number of lines of com- 
modities, retail prices were still high, weeks and months 
after wholesale prices had suffered a sharp decline. Such 
lagging movements of retail prices usually furnish the oc- 
casion for accusations that retailers are deliberately taking 
advantage of consumers, and sustaining prices at unreason- 
able levels for purposes of profit-making. 

Price Policies 

The entire discussion of the institmion of market values 
and prices up to this point carries firmly the inference that 
all of the factors in that institution are capable of a highly 
significant degree of guidance and control. However fun- 
damental the principles of supply and demand may be, 
nevertheless there is large room within them for ingenuity, 
strategy and manipulation between buyers and sellers. 
Hence a realistic study of market prices must give care- 
ful attention to price policies. Price policies represent the 
sagacity and shrewdness of the men in the market in their 
attempts to make profitable adjustments of prices within 
the limits set by the broad principles of price and value. 

Prices are often thought of as amounts set by laws of 
supply and demand. "While it is true that within limits, 
prices are set by supply and demand, it is equally true that 
iW. C. MitchelJ, "Business Cycles," pp. 93-134. 



320 Markets — Their Principles and Strategy 

witliin limits price policies can bring about new quantities 
of supply or of demand. Price policies originated by a 
shrewd man of the market are capable of changing pro- 
foundly the amount of goods which people will demand. 
It is imperative therefore, for a balanced view of market- 
ing institutions, to observe some of the ways in which de- 
liberately created price policies can and do transform fun- 
damental supply and demand relationships. Supply and 
demand determine prices, and, conversely, price policies de- 
termine supply and demand. 

Price policies may be classified on the basis of their 
relation to that price level in any branch of goods which 
is termed the market level. The market level is what the 
name implies, the prevailing price average in any branch 
of goods, the general price which obtains throughout the 
greater part of the market. To the extent that some de- 
gree of real competition still operates in a particular kind 
of goods, the general market price for those goods will tend 
to keep close to their marginal cost of production. It will 
be remembered that marginal cost of production is the 
cost which prevails among that fringe of producers of any 
line of goods whose costs are highest. To the extent that 
genuine competition asserts itself, it tends to force prices 
down constantly to a level just about even with the costs 
of those producers for whom production is so expensive 
that they can scarcely make ends meet and can scarcely 
afford to operate their plants. Any further reduction of 
prices would force them to produce at a loss, and so drive 
them out of business, and reduce the supply of goods to 
that amount. But in the modem business organization, 
perfect competition throughout the market is a rare phe- 
nomenon. To the extent that privilege, monopoly advan- 
tage, unfair or imperfect competition, characterize a branch 
of business, the prevailing market price will fail to be driven 
down to the marginal cost of production. The "normal 
price" of orthodox economic theory is the price even with 
the marginal cost of production, and hence "normal price" 
assumes a fairly full degree of free competition. Inas- 
much as the day of full and free competition is practically 



Markets — Their Principles and Strategy 321 

past, and the new order obtains in which each branch of the 
market is governed by partial competition and partial 
monopoly advantages, it is clear that so-called "normal 
price" has become virtually a myth of free competition 
theorists. The ordinary market price of the present order 
is Tinder the influence of association, combination, agree- 
ment, monopoly, privilege, and co-operation, and so varies 
somewhat from "normal price," and tends commonly to 
be somewhat above it. 

A business man in the market looks around him and ob- 
serves that the going price, the prevailing price for his line 
of goods, is at a certain level. He can formulate his own 
price policy along either of three different pathways. 
First, he can try to put his goods on the market at a price 
somewhat below the market level; second, he can offer 
them at the market level; third, he can attempt to dispose 
of them at a price somewhat above the market level. The 
deliberate adoption of either of these price policies will 
have marked consequences upon the basic conditions of 
supply and demand. 

Below the Market Level 

A new manufacturer entering a branch of business in 
which the market is already well occupied will find difficulty 
as a new-comer in disposing of the full product of his plant. 
As a means of persuading buyers to break old habits and 
sever old connections, he may offer to sell at a lower price. 
His great selling argument will be that his product is just as 
good as that which sells for more, but the price is cheaper. 
He appeals to the business judgment of buyers to buy high 
grade goods at a reduced price. This argument is an effort 
to undermine the confidence of buyers in a standard brand 
of product with which they have been made familiar in the 
past through advertising, salesmanship, or experience. 
The new article must break down the old wall of buying 
habits by its appeal of lower price. It is frequent for 
manufacturers who desire to invade established lines of 
specialties which are well known in the market by trade 
marks and brands, to put their new goods, similar in use 



322 Markets — Their Principles and Strategy 

and purpose, up against the establislied lines at low prices. 
The handicap which the new goods have because they lack 
the reputation of the trade-marked brands is overcome by 
underselling the regular lines of goods. Many middlemen 
nowadays buy goods in bulk from producers, and put 
special brands of their own on the goods, and then sell the 
goods at shaded prices. They are able in this way to build 
up a good will for the new articles, through the use of 
dealers' trade marks, at the same time that they initiate 
the goods into the regular market by offering them at low- 
ered prices. 

Other manufacturers invade an established market by 
offering a grade of goods which is cheaper to make because 
it leaves off all frills and fancy work, and which appeals to 
a class of customers who care more for utility than for looks. 
The plainly made goods can be sold at lower prices than old 
lines in the market, and hence can draw into the market new 
groups of consumers who will buy goods of plain style pro- 
vided only the goods will give them the service which they 
desire. Illustrations would be found in the marketing of 
cheaper grades of furniture, and of low priced automobiles. 
The policy of many retail stores, particularly department 
stores, of dealing in *' seconds," is an application of the 
same general policy. Silk shirts or silk stockings with 
slight imperfections are offered as just as good to wear as 
perfect articles, and a great deal cheaper. 

It happens from time to time that manufacturers of long 
experience decide to expand their sales by adopting a new 
policy of a price scale below the general market level. The 
business man who assumes this change of policy has to 
calculate as carefully as possible the elasticity of the de- 
mand for his particular kind of product. For some com- 
modities, such for example as staple foods, lowered prices 
may increase demand somewhat, but there is a close limit 
to the amount of food which people can eat, and demand 
might not extend greatly in response to lowered prices. For 
other commodities, lowered prices might extend demand 
enormously. However, even in these branches of goods, a 
point would be reached at which demand elasticity would 



Markets — Their Principles and Strategy 323 

come to a halt. Below that point lowered prices would not 
call forth a commensurate amount of demand. It is a dif- 
ficult problem to ascertain for each different commodity 
where this point lies. Demand elasticity is a fundamental 
consideration with producers who lower prices for the sake 
of evoking an increased volume of sales. 

Another variation of the lowered price policy, and a 
highly significant one, appears in the price policies of many 
sections of the retail market. Each retailer in any given 
community is anxious to draw as much trade to himself as 
possible, and often the most fruitful means of attracting 
trade is some form of "cut price" policy. Chain stores 
and department stores are often able to sell some standard 
article, or a substitute article, at a cut price, and where the 
policy can be carried out, it is held to be good publicity. 
Bargain sales, bankruptcy sales, fire sales, etc., offer fre- 
quent supplies of goods at sharply reduced prices. Many 
retailers make it a practice to single out some two or three 
commodities to be advertised for sale at bargain prices. 
These "leaders" attract the consumer to the stores, and 
while the consumer is in the presence of a wide variety of 
other goods, he is tempted to buy things which he had not 
contemplated buying when he came to the store. As a rule, 
of course, what the retailer loses by the cut price on the 
"leaders," he has to make up at some other point in his 
business. Hence the seeming immediate advantage which 
the buyer of the cut price article has, does not reflect a 
general social gain to all consumers. The cut price policies 
in the hands of large retail stores, department stores, or 
chain stores are capable of being used, and not infre- 
quently are used, to drive small competitors out of busi- 
ness. 

As a means of combating the vicious effects of cut 
price retailing when misused, producers of standardized, 
trade marked goods have widely attempted what is known 
as "the price maintenance" policy. Under this policy, re- 
tailers are required to sell goods at standard prices. If a 
retailer obstinately cuts prices, the producer can thereafter 
refuse to sell the retailer a further supply of the brand of 



324 Markets — Their Principles and Strategy/ 

goods. This tacit ultimatum whicli the producer holds out 
to the retailer has for the most part proved adequate to 
coerce retailers into offering the goods to consumers at the 
standard prices. Although the policy in some respects 
subjects the retailers to an arbitrary control at the hands 
of producers, yet at the same time, the retailers are usually 
assured of a standard price which is high enough to allow 
for a reasonable rate of profit, and they are relieved of the 
fear that some powerful retailer in the community may at 
any moment destroy the trade of the mass of retailers by 
drawing all purchases of a particular brand of article unto 
himself, through a vigorously advertised cut price policy. 
The cut price policy when applied to standardized goods, is 
tjapable of serving as a ruthless measure of cutthroat com- 
petition, and the recent development of price maintenance 
is a move in the direction of regularizing and stabilizing 
the retail market.^ Price cutting results in temporary leaps 
of demand here and there, but price maintenance acts in 
the direction of an even, organized, steady demand.^ 

A further policy of selling at prices below the general 
market level appears in the custom of buying at inside 
prices. This policy occurs most conspicuously in the pur- 
chases made by retailers from dealers and producers. Re- 
tailers who can buy in large quantities often demand that 
the producers shall quote them a special price below the 
general level. Some manufacturers and dealers graduate 
their selling prices according to the quantities bought; 
others give special inside prices to large quantity buyers 
adapted to the advantages of each particular case. Sales- 
men often find it necessary to split their commissions with 
buyers in order to effect sales. Some buyers are quoted 

1 See Nystrom, "Economics of Retailing," Chapter XV. 

2 The United States Supreme Court, in the case of Colgate and 
Company, decided that it was legal to refuse to sell goods to retailers 
who would not resell at standard prices. In January, 1922, the 
Court decided the price maintenance policy of the Beech Nut Pack- 
ing Company unfair and illegal because it aimed to spy upon cut- 
rate dealers, to coerce jobbers as well as retailers, and to make a 
list of "undesirables" to be denied future supplies of goods. The 
decision was by a five-to-four vote, and the lines of difference be- 
tween fair and unfair price maintenance are indistinct. 



Markets — TJieir Principles and Strategy 325 

the regular price, but are given a bonus of extra goods, 
a form of concession which is the equivalent of an outright 
price reduction. Concessions in the form of liberal dis- 
count terms are used to discriminate in favor of certain 
buyers. All such price discrimination tends to handicap 
the small, independent retailer, and to give the edge of ad- 
vantage to the retailers who can buy on a large scale. It 
is a potential weapon for unfair competition, and because 
of the possible secrecy in dealing at inside prices, it is a 
difficult weapon to subject to adequate public control. 
The forms of public control are as yet indistinct, but the 
market conditions created by inside price policies are such 
as to make it important that ways and means be devised 
for a proper safeguard against their misuse in unfair com- 
petition. A careful authority has stated: '*As matters 
now stand, the inside-price problem is the most disturbing 
element in business. More of the evils of unfair trad© 
can be traced to this as a cause than to any other single 
item."i 

At the Market Level 

The very fact that there is a general market level pre- 
supposes that a substantial body of buying and selling 
is done at that level. Business men who sell at the market 
level cannot attract trade by arguing that their goods are 
cheaper than the goods of their competitors. The incentive 
of cheapness cannot be appealed to.. Hence it becomes 
necessary to build up a large demand by appealing a great 
deal to non-financial incentives. Just as it has been found 
that wage workers yield to other incentives than purely 
financial ones, so it is apparent that consumers are stim- 
ulated to buy through other incentives than cheapness. 
The superior quality of the goods, the artistic appearance 
of packages, the suggestive force of good advertising, the 
personal selling power of trained salesmanship, — all of 
these factors aid in building up trade for dealers who are 
selling at the market level. Good will is capable of de- 

iNystrom, "Economics of Retailing," p. 299. 



326 Markets — Their Principles and Strategy 

velopment by many other means than cheap prices. Ser- 
vice, courtesy, efficiency, promptness are non-financial 
pathways of creating market reputation, and increasing 
sales for specially adept dealers. Competitors who wish to 
increase their sales, but who sell at the market level, rely 
therefore upon a demand induced by non-financial services 
and strategies. 

Above the Market Level 

It is a frequent policy nowadays to offer goods at prices 
which are conspicuously high. When this policy is adopted, 
the reliance upon a demand created by non-financial tactics 
is carried to an extreme. Goods priced above the market 
level ordinarily require heavy advertising, careful sales- 
manship, and the use of brands and trademarks. People 
who can be induced to buy expensive brands are wont to 
pride themselves often on the fact that they secure peculiar 
excellence and extraordinary service. They enjoy con- 
spicuous extravagance, and often secure satisfaction from 
wearing expensive clothes or consuming expensive fsod 
simply because their friends and rivals will know that the 
things are expensive. Superior price is a suggestion that 
the goods are bought by superior people, and the instincts 
of display, rivalry and self-assertion are particularly vul- 
nerable to appeals of that sort. Consumers' demand is 
created for the benefit of dealers who carry luxuriant goods 
at luxuriant prices, and who boast of the reputation of sell- 
ing only at top-notch prices. Of course, different classes 
of people are limited by their various incomes in the ex- 
tent to which they can succumb to the incentives to con- 
spicuous extravagance. However, of late, particularly 
favored members of the groups dependent upon wage in- 
comes have taken to imitating the more well-to-do classes, 
and many of them have become notorious for their lavish 
expenditure on high priced brands of clothes, furniture, 
foods and the like. The type of appeal which brings about 
this situation rests substantially upon the use of trade 
brands. There is no other means by which to single out a 
particular dealer's goods from the general run of goods, 



Markets — Their Principles and Strategy 327 

and attract unusual, permanent attention to them. The 
tactics of creating demand for high priced goods by the use 
of advertised brands is mainly a matter of understanding 
social psychology. Dealers who can cultivate shrewdly the 
instinctive demands of people who are heavily susceptible 
to psychological traits of display, prestige, imitation, ri- 
valry, pride, vanity, ostentation, and suggestion hold a 
clue to the building of a market for their wares at prices 
well above the general market level. 

Business Combinations and High Price Policies 

The extremes of the form of price policy just enumer- 
ated usually appear among the specialties, and only the 
milder forms usually among the staple necessaries of life. 
But among both classes of commodities, and, in fact, 
throughout the market organization from end to end, there 
is a tendency to the development of forms of trade combina- 
tion and association which are frequently connected with 
high price policies. Monopolies are supposedly the most 
guilty perpetrators of price exactions above a reasonable 
market level. An examination of some of the price aspects 
of business combinations, trade associations, and monopo- 
lies is closely concerned therefore with the whole problem 
of price strategy and marketing institutions. 

The concentration of industrial and trade control in re- 
cent years is explained more fully in the chapter on Man- 
agement. It is important at this point to consider the 
movement toward business combination primarily from 
the standpoint of its influences on price policies and market- 
ing functions. The modern market is neither freely com- 
petitive nor completely monopolistic. Whichever of the 
hundreds of separate branches of industry and trade may 
be chosen for investigation, it is quickly found that there is 
both an element of competition and an element of monopoly. 
Partial competition and partial monopoly characterize 
virtually all fields of trade. Monopoly, therefore, is always 
a question of degree. The extent to which competition re- 
mains and the forms which it takes vary strikingly from 
industry to industry. One hundred per cent, monopoly 



328 Markets — Their Principles and Strategy 

and one hundred per cent, competition are equally hard to 
find. It is always a question of more or less, and the pro- 
portions vary from month to month and year to year in 
each field of trade. The nearest approach to full monopoly 
occurs in such fields of natural monopoly as railroads, pat- 
ented articles, and municipal water, gas or electricity sup- 
ply. But even in these branches of natural monopoly, 
there are limits to monopolistic power, and if these limits 
do not always appear in terms of potential competition, 
they then present themselves in terms of public regula- 
tion.^ After a detailed examination of many forms of 
business, C. R. VanHise draws the broad conclusion: "The 
foregoing description of the situation cannot but convince 
any man who will look the facts in the face that the blind 
faith that prices are adequately controlled by competition 
in the United States is no longer justified, if indeed it ever 
was justified. Unrestrained competition does not as a 
matter of fact exist for many articles, except to a very 
limited degree at the present time. Everywhere there is 
restraint of trade by agreement or combination, either law- 
ful or unlawful." A comprehensive view of the new eco- 
nomic situation is given by Woodrow "Wilson as follows: 
' ' There is one great basic fact which underlies all the ques- 
tions that are discussed on the political platform at the 
present moment. That singular fact is that nothing is done 
in this country as it was done twenty years ago. "We are in 
the presence of a new organization of society. "We have 
changed our economic conditions absolutely from top to 
bottom. ' ' 

Monopoly in all forms and degrees is typically char- 
acterized by a control over prices, and this price control is 
made possible by control of supply. "A partial monopoly 
exists," says Carver, "whenever an organization exercises 
sufficient control over the supply of anything to enable it to 
fix its prices, even with a narrow zone, independently of 
competition,"^ Concentrated business estimates the price 

lA, Marshall, "Industry and Trade," pp. 394-402. 

2 Carver, "Principles of Political Economy," p. 291. See, also, 
Ely, "Outlines of Economics," pp. 200-201 ; Haney, "Business Organi- 
zation and Combination," p. 141. 



Markets — Their Principles and Strategy 329 

at which a certain quantity of goods can be sold to yield 
the highest net profit, and proceeds to produce or contract 
for only that limited supply Large businesses, like small 
businesses, aim ordinarily to charge "all that the traffic 
will bear." But large businesses are in a position usually 
to heighten the figure which "the traffic will bear" by re- 
fusing to sell the supply which it controls except at its fixed 
price. If the monopoly uses discretion in setting its price, 
and avoids overdoing the price-raising policy, it will or- 
dinarily be successful in selling its goods at the increased 
figure. In weak monopoly organizations the limits within 
which monopoly price can be held up are especially narrow. 
In some of the stronger monopolies, price exactions for 
short periods of time can often be pushed up surprisingly 
high. The degree of price control will vary widely from in- 
dustry to industry, and the variation is in fairly close pro- 
portion to the degree of control over supply. 

Theoretically, monopoly, complete or partial, should be 
able to elevate prices, and in the popular mind, monopoly 
suggests profiteering prices more vividly than anything 
else. It is a moot question therefore: Has monopoly, as a 
matter of historical fact, actually raised prices? The an- 
swer has to be two-sided : some monopolies have taken full 
advantage of their price fixing powers and have reaped 
exorbitant harvests; some have effected large savings and 
economies in production, and have thereby made possible 
reductions in consumers' prices without themselves suffer- 
ing inroads upon profits. Some concrete evidence on the 
issue is available in the studies of J. W. Jenks, based largely 
upon the findings of the United States Industrial Com- 
mission,^ and of subsequent government records on indus- 
try. His reports show the margin between costs and selling 
prices both before and after monopoly powers existed. 
This spread indicates whether the public was given full 
advantage of economies of business combination, and 
whether prices were maintained for any length of time at 

i"The Trust Problem," Chapter VII. Published, 1900: Revised, 
1912. 



330 Markets — Their Principles and Strategy 

monopoly levels. The following extracts and digests from 
his conclusions are highly valuable: 

1. Sugar Monopoly. — "The sugar combination has be- 
yond question had the power of determining for itself, 
within considerable limits, what the price of sugar should 
be, low or high, with or without competitors. . . . On the 
whole, the chart seems to make it perfectly evident that the 
sugar combination has raised the price of refined sugar be- 
yond the rates in vogue during the period of active com- 
petition before the formation of the Sugar Trust, and the 
two competitive periods during its existence." 

"From the time of the organization of the Trust in 1887, 
for twelve or thirteen years the Trust kept the margin high 
for more than three-quarters of the time. Since that 
period, the margin, it will be noted has steadily remained 
considerably higher than during the period of most vig- 
orous competition in the few years preceding the organ- 
ization of the Trust, and during the two periods of vigor- 
ous competition since that time. . . . Although they have 
made excellent profits during the last few years, the mar- 
gin certainly during the last three or four years can hardly 
be said to be abnormal." However, in relation to the gen- 
eral price level of all commodities, sugar prices are not 
higher. Prices of other commodities from 1900 to 1914 
show a greater increase than do sugar prices. "The total 
result seems to indicate that if the sugar combination in 
the United States has had any direct influence upon the 
price of sugar, it has been rather to reduce that price than 
to increase it." 

2. Petroleum. — "The Standard Oil Trust was formed 
in 1882. From that time on for a period of eight or nine 
years, there was only a slight decrease in the margin." 
From 1892 to 1894, the margin fell considerably lower, and 
up to 1916, the prevailing margin was not up to the low 
point of 1894. "Taking the period as a whole, . . . from 
1900 to date (1916) it will be seen that this great combina- 
tion, as practically all of the others, seems not to have 
raised the price of its chief product to an amount that cor- 
responds to the rise in the price of general commodities." 



Markets — Their Principles and Strategy 331 

These facts of themselves do not adequately tell the story 
of monopoly in petroleum. The dividends paid on the out- 
standing capital stock were in the neighborhood of 30 to 
48 per cent, annually, and the charges brought against the 
Standard Oil Company which resulted in its dissolution by 
a decision of the Supreme Court in 1911 mentioned ** enor- 
mous and unreasonable profits." The Bureau of Corpora- 
tions in an investigation in 1904 and 1905 found that "The 
Standard discriminates greatly in fixing prices in different 
sections and in different towns, charging extortionate 
prices where there is no competition and cutting prices 
sharply where competition is active. . . . The profits of 
the Standard Oil Company, particularly on its domestic 
business, are altogether excessive, and they have been 
higher during recent years than formerly. The real source 
of the Standard's power is not found in the rendering of 
superior service to the public, but in the long continued 
use of unfair methods of competition." After the dissolu- 
tion. Standard Oil oil stock quickly rose more than three 
hundred points, indicating the faith that the dissolution 
would not impair the industry's power to earn large 
profits. Federal Trade Commission reports indicate that 
oil profits during and after the war were highly liberal. 

3. Steel. — The United States Steel Corporation was 
formed in 1901. According to Jenks, "After the formation 
of the United States Steel Corporation ... a new policy 
seems to have been adopted — that of seeking good profits, 
but not extraordinary ones. . . . The effect of the United 
States Steel Corporation seems to have been primarily to 
steady prices and to maintain more nearly a rate of prices 
of the finished product dependent upon the costs of the 
leading raw materials so far as that can be readily deter- 
mined." Steel prices have not moreover risen as much in 
the period 1900-1914 as the prices of commodities in gen- 
eral. In spite of these facts, a study of earnings and prices 
of the Steel Corporation seems to warrant the brief conclu- 
sion stated by Van Hise, "Excessive prices; these have 
resulted in enormous earnings. ' ' ^ The war years brought 
I "Concentration and Control," p. 140. 



332 Markets — Their Principles and Strategy 

generous profits to the steel combination. The Federal 
Trade Commission found that the profits of the United 
States Steel Corporation rose from about $77,000,000 in 
1912 to over $478,000,000 in 1917. 

These brief comments indicate a wide variety of effects 
of business combinations on prices and profits. In many 
cases, the lines of industry in which a high degree of com- 
bination has prevailed, have maintained prices lower rela- 
tively than the average prices of all commodities. Never- 
theless, the predominant fact has been liberal profits, often 
excessive profits, made possible in large degree by the ability 
of leading corporations to influence prices. Jenks con- 
cludes that "The result has been to establish fairly gener- 
ally the business policy of not attempting to secure any- 
thing like a complete monopoly of the market, but rather 
for the combination to fix its prices at such a rate that it 
may secure under normal conditions substantial profits 
while its competitors are still a;ble to live and prosper."^ 
Court decisions have generally confirmed the charges of 
unwarranted price policies and industrial investigating 
commissions have reported to the same effect. Economists 
for the most part take a stand essentially similar to that of 
J. A. Hobson when he declares, "But a trust is always 
able to charge prices in excess of competitive prices, and 
it is generally its interest to do so, ' '^ and that of R. T. Ely, 
when he writes, "The conclusion which we reach then is 
that monopoly prices are generally higher than competi- 
tive prices. . . . The higher the average of well-being, and 
the more readily they spend money, the higher will be 
that price which will yield the largest net returns. We 
have these conditions meeting in the United States. "We 
have a high average of well-being, and a great readiness 
in the expenditure of money, and consequently we have 
a high monopoly price. "^ Large combinations of capital 

1 "The Trust Problem," p. 178. 

2 "Evolution of Modern Capitalism," p. 160. 

3 Ely, "Monopolies and Trusts," 136-137. See, also, Taussig, 
"Principles of Economics," Vol. II, pp. 112-113; J. B. Clark and 
J. M. Clark, "Control of Trusts," 12-13; Van Hise, "Concentration 
and Control," P- 84; Jenks and Hammond, "Great American Issues," 



Markets — Their Principles and Strategy 333 

have been exceedingly reluctant to pass on to consumers 
the full benefit of economies and efficiencies of production. 
Experience has taught monopolies, partial or otherwise, 
the expediency of exercising monopoly influences over 
prices within much narrower limits than were attempted 
during the period of first formation of great business 
combinations. 

Business combinations have developed, moreover, a prac- 
tical method of adapting price policies to all classes, grades 
and varieties of consumers. Each grade of consumer is 
offered a grade of commodity particularly calculated to 
stimulate demand in that level of consumers. In almost 
all kinds of commodities, some people want the very best, 
some want the best, some want a good grade, some want 
"seconds." Some want fancy style, some want utility, 
some want certain combinations of the two. The price 
which each grade of consumer can be persuaded to pay 
for the most attractive grade of goods is a matter for 
painstaking calculation. Instead of using the advantage 
of its great influence in determining a single price, the 
partial monopoly frequently gives its attention to work- 
ing out a set of prices to cover the demands of varieties of 
consumers. Instead of a uniform monopoly price, a scale 
of monopoly prices takes the field, each catering to a special 
class of buyers, and figured on the basis of "all the traffic 
will bear ' ' for that class. Often the so-called superior grade 
of goods is only something of about the same quality, 
dressed up in a finer appearing package, and bearing an 
aristocratic brand. The superfine article must radiate a 
certain atmosphere of exclusiveness in order to appeal to 
exclusive people, and must exhibit an elite style in order to 
arouse buyers of fastidious tastes. With the quality and 
style of the various grades of goods nicely calculated, prices 
are attached which should attract enough buyers to absorb 
the quantity offered by the business combination. More- 
over, corporations have sometimes attempted to formulate 

p. 167; Haney, "Business Organization," p. 137; Macrosty, "Trust 
Movement in British Industry," pp. 335-337; E. Jones, "Trust Prob- 
lem in the United States," Chapter XI. 



334 Markets — Their Principles and Strategy 

price policies which would take advantage of the fact that 
some buyers can afford to pay more for the same article 
than others can. This principle found its greatest accept- 
ance probably in the rebates of railroads. The railroads, 
before drastic regulation took effect, made it a common 
practice to charge different shippers different freight rates 
for the same railroad service.^ The price policy may thus 
easily become what each individual will bear, or what a 
group of individuals of a certain grade will bear, instead 
of what the general traffic will bear. This gradation of 
prices to suit gradations of buyers is an innovation accom- 
panying large scale business, and is primarily attributable 
to the discovery by the monopolist or semi-monopolist that 
only by such a device can he reap the largest net gains. 

Monopoly Price and What the Traffic Will Bear 

The monopoly price for each grade of goods, or the 
monopoly price for all the articles in an ungraded indus- 
try, is the outcome of an elaborate mathematical calcula- 
tion. A large quantity of goods selling at a moderate price 
may yield more net profit than a small quantity of goods 
selling at a high price. Monopoly price is not the highest 
price at which some goods can be sold, but is. the price which 
will sell that quantity of goods yielding the largest net 
profit. Assume a commodity which costs one dollar to pro- 
duce. If the selling price is made $1.50, the total sales may 
be 1000 articles. The net gain would therefore be $500. 
But assume the price is put at $1.40, and that at this lower 
price the volume of sales is 1500. Obviously the net gain 
at the lower monopoly price is $600, This illustration will 
suggest the fact that a multitude of combinations can be 
figured out, and that some one combination of selling price 
and volume of sales will yield the maximum net revenue. 
Generally speaking, large business combinations prefer to 
lean toward as small a volume of sales as possible at as large 
a price as possible, in so far as that is not inconsistent with 
the maximum net gain for the industry. Enormous pro- 

1 Refer to A. Marshall, "Industry and Trade," pp. 415-417, for 
further explanation. See, also, Ely, "Monopolies and Trusts," pp. 
108-118. 



Markets — Their Principles and Strategy 335 

duction at the lowest possible prices is not sought after so 
nmch as limited production at prices high enough to yield 
liberal net profits. This fact has been the basis for the 
repeated accusation brought by production engineers that 
"if we could harvest more dollars by producing fewer 
goods, we produced the fewer goods. "^ To the extent that 
this policy is in vogue, it brings a private net gain at the 
expense of a net social loss. It is scientific restriction of 
production which yields maximum business profits but 
which furnishes society with too few goods at too high 
prices. Hence, to charge what the traffic will bear is a 
policy which is capable of bringing either social good or 
harm, according as it is applied. 

Monopolies and the Steadying o£ Prices 

A frequent price achievement under large scale business 
is the steadying of prices. For example, from 1901 to 1916, 
the United States Steel Corporation maintained the price of 
steel rails steadily at $28 a ton. Other large corporations 
make it a policy to raise prices somewhat more slowly than 
the general market rise during a period of increasing prices, 
and to lower prices less swiftly and less sharply in a period 
of falling prices. Industrial combinations which own and 
control their own sources of raw materials, such as coal or 
iron mines, are particularly able to steady their selling 
prices because they are in a position to regulate their costs 
of production more evenly. Some semi-monopolistic cor- 
porations, however, have an unsteadying effect on prices. 
For instance, from time to time a newly formed combina- 
tion seeks to establish itself in the good graces of buyers by 
starting out with a price below the market level. After a 
certain amount of good will is built up, the combination 
stealthily elevates its prices to all that the traffic will bear. 
In the course of the transition, the other producers and 
dealers in the field are face to face with anything but a 
steadying influence. Another class of big combinations has 
been found to fix their prices so extremely high that the 

1 H. L. Gantt, "Organizing for Work," p. 24. See, also, Van Hise, 
"Concentration and Control," p. 85, and Jenks, "The Trust Problem," 
p. 63. 



336 Markets — Their Principles and Strategy 

exorbitant profits have invited competitors to enter the field. 
Then has ensued a price war and cutthroat competition, all 
of "which has caused prices to go down from the former 
great heights to a point equal to the cost of production, and 
even for a time below the cost of production. It is safe to 
state, however, that this condition, of violent price fluctua- 
tions occurred principally in the early years of experience 
of business combinations, and that the experience thus 
dearly bought has persuaded many business leaders to avoid 
extremes of monopoly price likely to invite new competitors 
to engage in bitter price wars. On the whole, therefore, the 
later periods of large scale business have been marked by 
an endeavor to exert a steadying influence on price levels, 
and to avert violent fluctuations. 

Price Discrimination 

The price policies of monopolies and of partial monopo- 
lies have often been gauged with a view to destroying com- 
petitors. One of the most notorious and destructive forms 
of price discrimination has been local price cutting. Using 
this device, a large business combination seeks to drive out 
of business its competitors in a given locality by putting the 
local selling price extremely low, even below the cost of 
production. The combination makes up for its loss in the 
competitive locality by charging a higher price for its com- 
modities throughout the rest of the country. After the local 
competitor has been driven out of business by the ruinously 
low local prices, the monopoly comes into control of the 
local market, and can then boost the local prices to all that 
the traffic will bear, without fear of opposition. The his- 
tory of the American Tobacco Company and of the Stand- 
ard Oil Company is replete with illustrations of these 
death-dealing price attacks on local competitors. A careful 
survey of the policies of the country's greatest monopolies 
led Louis Brandeis, now a Justice of the Supreme Court, to 
declare in 1913, "Americans should be under no illusions 
as to the value or effect of price cutting. It has been the 
most potent weapon of monopoly — a means of killing the 
small rival to which the great trusts have resorted most 



Markets — Their Principles and Strategy 337 

frequently." Price cutting is now declared illegal when 
the purpose of it, whether avowed or concealed, is to sub- 
stantially lessen competition or tend to create a monopoly. 

There are other devices that have been widely practiced 
which have the common purpose of crushing small competi- 
tors. The operation of bogus "independent" concerns, in 
reality branches of a concentrated corporation, enables the 
large concern to camouflage its real purpose of killing com- 
petitors. The cutting of prices below costs on certain 
"leaders" or "fighting brands" often is an effective way of 
driving rivals out of business, particularly when the rival 
is largely dependent upon that particular brand of com- 
modity for his profits and when it is only an incidental 
brand in the traffic of the big combination. Other large 
concerns have found it exceedingly destructive of competi- 
tion to insist that dealers who wish to buy certain articles 
will not be allowed to buy the desired articles unless they 
also buy certain other articles for which the large producers 
wish to force a market. Some producers will not sell to 
dealers unless they agree to sell only that line of article, 
and no other. Rebates from regular prices are sometimes 
offered to dealers for pushing with special vigor the brands 
of one producer to the exclusion of those of his rivals. The 
attitude of the law and the courts toward these and other 
similar practices of price discrimination has generally been 
to consider them devices of unfair competition. The Clay- 
ton Anti-Trust Act of 1914, legislating with regard to the 
most menacing of these forms of price discrimination, laid 
down a broad test for determining what is fair and what 
unfair. It condemned price discriminations "where the 
effect of such discrimination may be to substantially lessen 
competition, or tend to create a monopoly in any line of 
commerce. ' '^ 

Mechanism for Exertion of Monopoly Influences on 
Price Policies 

The business mechanism for exerting monopoly price in- 
fluences varies widely. In some lines of commerce, definite 

1 See Section 2 of the Act. Also W. H. S. Stevens, "Unfair Com- 
petition," Political Science Quarterly, pp. 282, 460. 



338 Markets — Their Principles and Strategy 

centralization of management occurs, and trusts, corpora- 
tions, holding companies, mergers, and amalgamations take 
the place of former separated establishments. The common 
principle in such business concentration is a definite cen- 
tralization of management. Plants and companies which 
formerly were independent and sovereign become branches 
of a centralized management. Price policies in such com- 
panies are formed by the central management, and the con- 
stituent companies and plants direct their price policies in 
compliance with the uniform policies laid down by the cen- 
tral management. There is another great class of price 
agreements in the nature of understandings entered into 
between independent companies. Each branch of industry, 
each line of commerce, each field of production, almost 
without exception, has a business association of some sort. 
These associations serve a great many purposes, some of 
them constructive and some tending toward the fixing of 
excessive prices and the undue restraint of trade. The 
history of price agreements shows many forms of under- 
standing or bargaining entered into for the purpose of put- 
ting prices up to all that the traffic would bear. The * * Gary 
dinners" which maintained tacit understanding among 
steel producers as to what prices would be charged; "any 
number of dinner and luncheon clubs and reunions and 
general understandings, winks, and telephone messages,"^ 
mutual understandings between anthracite coal operators 
or big meat packers as to the distribution of business and 
price quotations, joint action among dealers in building 
supplies to charge contractors exorbitant prices for cement 
or brick, common price terms among wholesale grocers or 
among druggists, — in these and other ways, price agree- 
ments have been maintained at different times and in dif- 
fering degrees in most lines of economic activity. Agree- 
ments in the form of pools were at one time widespread. 
Pools involved definite agreements either to divide the prod- 
uct into quotas for each producer who belonged to the pool, 

1 Samuel Untermver, "Hearings Before Senate Interstate Commerce 
Committee," V, p. 214. 



Markets — Their Principles and Strategy 339 

or to divide the quantity each producer was to sell or the, 
territory in which he was to sell, or to put all profits of all 
companies into a common fund to be shared ultimately by 
the several companies on an agreed pro rata plan, or any 
combination of these policies. These agreements of one sort 
and another have run a harsh gauntlet of laws and court 
decisions, and have been generally condemned in so far as 
they result in undue restraint of trade, or unfair and un- 
reasonable profits. 

Trade associations have, however, found it possible to 
render most important services without as a usual thing 
indulging in illegal price practices. They provide for an 
exchange of information about the basic facts of production 
costs, market conditions, trade statistics, credit ratings, 
standardization of qualities and grades, freight and traffic 
matters, labor policies, trade legislation, insurance rates. 
Trade associations were encouraged during the War as a 
medium by which government agencies could direct indus- 
try effectively toward meeting war time conditions. They 
fui'nished a definite organization through which the War 
Administration could communicate its wishes to the hun- 
dreds of thousands of individual companies the country 
over. The advantages of co-operation became so apparent 
that trade associations did not wane after the War, but 
grew in strength and membership. The cooperative efforts 
of trade associations to supply information on production 
costs have led to greater uniformity in prices in many cases. 
The trade information is often kept strictly in the hands of 
members, with the result that although there may not be 
collusion or definite agreement on price policies, there is 
created a fairly uniform price control. Each man acts upon 
the same exclusive information as the other members of his 
trade association, and the uniform price action resulting has 
substantially the same effect in many cases as though it 
were the outcome of collusion among traders. The legal 
status of such trade association policies is not yet clearly 
determined. It would appear reasonable and possible to 
retain the constructive services and co-operative features of 



340 Markets — Their Principles and Strategy 

trade associations and to discard whatever undue monopoly 
influences attempt to assert themselves.^ 

Limits to Monopoly Influence on Prices 

Efforts to maintain monopoly prices are subject to cer- 
tain limits and restrictions of a very important nature. 
Economic and political forces combine to put checks upon 
monopoly ambitions after they have passed certain limits. 

1. Limit in demand. A monopoly in a necessity of life 
may at times drive prices to extraordinary heights because 
people cannot do without, no matter what the price. The 
era of specialized manufacture has brought into the market 
so many articles which were at one time luxuries or com- 
forts, but have become by custom and habit virtual necessi- 
ties that monopoly in these lines can count upon a fairly 
stubborn and insistent demand. 

2. Limit in potential competition. If a monopoly 
pushes the prices of goods so high that profits are great, 
competitors will probably be drawn into the field. The new 
competitors will then engage in a price war with the old 
business combination, and after a time, the combination 
may buy out, or crush the competitor, or the competitor 
may survive, and continually harass the original combina- 
tion with its competitive prices. Although potential com- 
petition is existent and may possibly enter the actual field 
at any time, nevertheless prospective competitors are likely 
to think twice before sinking their time and money in many 
lines of business, realizing full well the ruthless attitude of 
many big companies toward venturesome competitors. 
Inertia, too, works against a ready entrance of competitors 

1 See special reports of "Federal Trade Commission in 1921 on 
Trade Associations and Open Price Associations." Also J. E. Davies, 
Commissioner of Corporations, 1915, "Trust Laws and Unfair Com- 
petition," Chapter XI. The legal status of the open competition and 
open price policies of trade associations is still indistinct. In De- 
cember, 1921, the Supreme Court decided the American Hardware 
Manufacturers' Association contrary to the Sherman Act, because by 
the exchange of information on prices, production volume and costs, 
sales, etc., the Association served to restrict competition and to 
raise prices by concerted action. This was a five-to-four decision, 
and leaves some doubt as to what such associations may and may 
not do. 



Markets — Tlieir Principles and Strategy 341 

into lines of business where prices and profits are high. 
Hence, although potential competition serves to keep mo- 
nopoly efforts within certain limits, those limits are highly 
variable and indefinite. 

3. Limit in possible substitution. If the price of beef 
runs too high, people can eat mutton or pork. If gas rates 
are put too high, electricity is likely to come in. If the 
price of one form of article becomes exorbitant, buyers can 
pass it by and purchase substitutes. Monopolists who 
experiment with prices face the imminent danger of losing 
trade altogether by driving buyers to use articles which 
will give practically an equivalent of satisfaction and 
utility.^ 

4. Limit in public control. "When trusts and all forms 
of big business first made their appearance, the country 
was naturally bewildered to know how to handle the new 
phenomena. While legislatures were experimenting with 
various types of laws, and courts were maturing judicial 
viewpoints, it was possible for monopolies to take advan- 
tage of the situation, and indulge in practices of unfair 
competition, price discrimination, and price boosting which 
have later come under the ban of the law. The Sherman 
Anti-trust Act of 1890 has been interpreted as disap- 
proving any conspiracy or monopoly in undue and un- 
reasonable restraint of trade. After the law had been 
on the statute books for twenty years, the Supreme Court 
read into the act "the rule of reason," by which it inter- 
preted the Act to prohibit, not all restraint of trade, nor all 
monopoly, but only those interferences with trade and 
prices which were undue and unreasonable. There have 
been people who have continually charged that virtually all 
big business is bad business and dangerous business, and 
ought to be dissolved ; and simultaneously there h-ave been 
people who have steadfastly maintained that big business 
is the natural institutional evolution of this day and age, 
and that its economies and advantages can be retained while 

1 See J. A. Hobson, "Evolution of Modern Capitaliam," pp. 230- 
235 ; J. B. Clark and J. M. Clark, "The Control of Trusts," pp. 28, 
123-127. 



342 Markets — Their Principles and Strategy 

its evils and dangers can be regulated out of existence. 
The general philosophy of both groups has been in evidence 
in recent judicial decisions and government legislation. 
The most notable pieces of concrete legislation by the Fed- 
eral Government have been the Federal Trade Commission 
Act and the Clayton Anti-trust Act, both passed in 1914. 
The Federal Trade Commission investigates trade practices, 
orders offenders to refrain from methods of unfair compe- 
tition, publishes facts as to costs, prices and profits for 
various lines of industry and trade, enforces the provisions 
of the Clayton Act, keeps informed as to the extent to which 
companies carry out the decrees of courts under the Sher- 
man Act, and investigates combinations for foreign trade. 
Chiefly, the weapon which the Federal Trade Commission 
wields is investigation and publicity of the facts of business, 
and co-operation with business men in the direction of com- 
pliance with federal law without expensive litigation in the 
courts. 

The Clayton Act forbids monopolistic price discrimina- 
tions, new holding company formations, and interlocking 
directorates. The last two provisions are especially aimed 
at big business as such, and rest on the assumption that size 
itself is a menace. For the most part, outside of these two 
provisions, both the Clayton Act and the Federal Trade 
Commission Act aim not to destroy big business, but to 
make sure that the practices and price policies of business, 
whether large or small, shall be fair, and reasonable, and 
socially beneficial. They aim to make destructive compe- 
tition impossible, to put under the ban of the law the modes 
of warfare between business units of all sizes, which are 
predatory and vicious. And simultaneously they tend to 
preserve a large field for concentration of business, for 
moderate monopoly influences and advantages, for construc- 
tive co-operation and for competition which leads to the 
survival of the most efficient. The possibility of public 
control serves therefore as a limit to monopoly excesses and 
to unfair price policies.* 

1 See E. Jones, "Trust Problem in the United States," Chapters 
14-15. 



Markets — Their Principles and Strategy 343 

Natural monopolies, such as railroads, waterpower re- 
sources, gas and electric service, are so thoroughly asso- 
ciated with the public need that they have generally come 
within the scope of a more rigid form of public control. 
The Interstate Commerce Commission very closely super- 
vises the pecuniary policies of railroads. There has been 
powerful agitation of late to declare the coal industries and 
the meat industries public utilities and to subject them to a 
public control somewhat similar to that already exercised 
over the railroads.^ Public Service Commissions are com- 
mon devices for the regulation of lighting, heating, and 
municipal transportation services, and assert authority in 
varying degrees over rates or prices in the industries under 
their jurisdiction. Industrial concentration in the basic 
industries is already leading many careful students to raise 
the question whether concentration is socially safe except as 
it is subjected to a substantial measure of public regulation 
and control. The maturing of opinion upon this issue will 
undoubtedly hinge largely upon the manner in which con- 
centrated business orders its policies, with regard to prices 
and all matters tinged with a public import, during the 
next few years. Unless the device of publicity and prohibi- 
tion of unfair competition as now administered by the 
Federal Trade Commission serves to maintain a policy of 
price moderation and to eliminate the grosser cases of profi- 
teering, the next degree of public control will be demanded 
hy the public, namely outright government regulation sim- 
ilar to that exercised through the Interstate Commerce 
Commission or the Public Service Commissions. 

The record of profiteering, as reported by various govern- 
ment authorities, especially during the first years of the 
War and during the months closely following the armistice, 
has left grave doubts in the public mind as to the willing- 
ness of big business concerns to moderate their price and 
profit policies within satisfactory bounds. Moreover, the 

iThe Packers' Control Bill, passed by Congress in August, 1921, 
established regulation of the meat packers to be administered under 
the Secretary of Agriculture. The law provides for uniform ac- 
counting by the packers, for publicity of the packers' affairs, and 
for definite powers of the Federal Trade Commission to investigate 
the industry, 



344 Markets — Their Principles and Strategy 

experience of the government with price fixing during the 
war had a sufficient degree of success to make it fairly clear 
that at any time when the step seems desirable, the govern- 
ment can effectively create the governmental machinery 
suited to price fixing in times of peace. The War demon- 
strated that price fixing is not an economic impossibility. 
Once price fixing has been proved possible of achievement, 
it is always ready at hand as a device to be called into being 
to correct price abuses which creep into private business 
combinations. Comparisons made by the War Industries 
Board indicated that the average prices for controlled arti- 
cles increased during 1917-1918 much less than did the 
prices of uncontrolled articles.^ Although the methods of 
price fixing were not uniform between all bureaus and de- 
partments, nevertheless in the main they adhered with 
reasonable closeness to the objective laid down by President 
Wilson on July 12, 1917, namely, that the fixed price should 
be sufficient to "sustain the industries concerned in a high 
state of efficiency, provide a living for those who conduct 
them, enable them to pay good wages and make possible 
expansions of their enterprises." Price fixing in time of 
peace would be handicapped by lacking the equivalent of 
the high spirit of patriotic co-operation from business men 
which prevailed during the war emergency, and hence is not 
likely to be resorted to during peace times except as the 
need is urgent. The possibility of price fixing hangs as a 
kind of tacit ultimatum to monopolists who might like to 
boost prices unduly, and hence serves as an important limit 
to monopoly price policies.^ 

Relation Between Price Policies and Supply and Demand 

It is obvious at this stage of the analysis that supply and 
demand allow considerable leeway for human ingenuity and 
strategy. Over broad periods of time, and in the long run, 

1 "War Industries Board, Fluctuations of Controlled and Uncon- 
trolled Prices," p. 8. 

2 See "Carnegie Studies : Prices and Price Control During the 
World War," and American Economic Review Sup., March, 1919, 
pp. 233-276; F. W. Taussig, Quarterly Journal of Economics, Feb., 
1919, p. 238. 



Markets — Their Principles and Strategy 345 

supply and demand operate as general tendencies and 
fundamental forces. But they are not hard and fast, nor 
absolutely binding laws which determine prices to a nicety. 
Within the limits of their fundamental tendencies there lies 
ample room for policies of manipulation and control. De- 
mand can be expanded or contracted by deliberate action 
on the part of business men and supply can be curtailed, 
hoarded, or multiplied as business judgment dictates. Price 
policies at, or above, or below the market level, can be ap- 
plied in ways which alter both supply and demand. From 
practical observation of business practices the country over, 
the Comptroller of the Currency, D. R. Crissinger, declared 
in April, 1921: "Manufacturers, jobbers, wholesalers, re- 
tailers, laborers — are all in some sort of combination to 
frustrate this fundamental law of economics {i.e., supply 
and demand). Each is out to "get his" first. . . . These 
combinations — gentlemen's agreements, or what not — have 
gotten prices of things to the point where there is no rela- 
tion between cost of raw materials and cost of production ; 
no relation between cost of production and cost to the con- 
sumer; in short, where there is no relation between value 
and selling price. ' ' Due allowance must of course be made 
for the sweeping character of so emphatic a declaration. 
A conservative judgment on the same general subject may 
well be quoted, from the pen of a highly respected Ameri- 
can economist, F. W. Taussig: "The response of demand 
to new conditions of supply and price is very uncertain. 
The penumbra is wide. Within it there is much room for 
fluctuation of opinions and therefore of price, for the influ- 
ence of an aggressive operator or a commanding firm and 
for indeterminate phenomena. . . . There is no telling 
what immediate response there will be to an offer of larger 
supply or to a decline in the day's or week's quotation. A 
heavy sale by a big operator and a lower price accepted by 
him may easily mean not that more will be bought by 
others, but that buyers will be scared off and that price 
will fall still further. 

"The market may react in all sorts of ways to changes 
in offers and bids and going prices. The outcome depends 



346 Markets — Their Principles and Strategy 

on men's hopes and fears and guesses, and momentary 
states of mind. The nervy man may make money by coolly 
watching his more sensitive fellows and playing on their 
frailties. 

"Often lower price does not lead to an increase in the 
quantity that can be disposed of in a market. Neither does 
it necessarily lessen the quantity that will be offered there. 
On the contrary, it will repeatedly happen that as price 
f aUs, less is demanded, not more ; and that not less is offered 
for sale, but actually more. A decline in price, so far from 
tending always to bring its own remedy through tempting 
people to buy more, sometimes intensifies itself through 
inducing people to sell still more." A further indication 
of the flexibility which the general market principles must 
contain is seen in the following words by H. C. Emery, 
made as a result of extended investigations by the United 
States Tariff Commission: "The price paid by the con-, 
sumer and the price received by the producer seem to have 
very little direct relation. ' ' ^ 

The Science of Spending Money 

Economies has often been defined as the science which 
deals with the wealth-getting and wealth-using activities of 
human beings, but the emphasis of economic analysis has 
been overwhelmingly on the wealth-getting activities, and 
very slightly on the wealth-using activities. The War at- 
tracted the attention of students to the problem of wealth 
using, especially by its urgent requirements for thrift and 
saving, for elimination of waste and extravagance, for dis- 
tinguishing between essential and non-essential wants, for 
patriotic guidance in numberless ways of consumers' 
choices. It was made unmistakably clear that in time of- 
war consumers' choices were not their individual busi- 
ness merely, but were vitally the business of the nation. 
National efficiency depended upon wise consumption; and 
at great cost the government set out to educate people on 
matters of good consumption and bad consumption from 
the standpoint of helping to win the war. Hence the war 

1 Quarterly Journal of Economics, May, 1921, pp. 396-410. 



Markets — Their Principles and Strategy 347 

necessities broke the time-worn tradition of economics that 
what a person wants to spend his money for is his own 
affair, and established the principle that it is the nation's 
affair. Unwise spending during war time would rapidly 
weaken the military efficiency of the nation. Indeed, to 
some who have considered the problem in its broadest 
aspects, it appears that unwise spending has definite cause 
and effect connections with national progress or decay. This 
is the view of T. N. Carver: "The importance of the con- 
sumption of wealth is further emphasized by the considera- 
tion that as many and as dire calamities have overtaken, 
nations and peoples because of their irrational habits of 
consumption as because of inefficient systems of production, 
exchange or distribution. ... A few are already begin- 
ning to discover that consumption is more important than 
production, exchange or distribution, — possibly more im- 
portant than all three combined."^ 

The ultimate destination of economic activity is the 
spending of income for purposes which satisfy the spender. 
Goods are produced as a means toward the end of consump- 
tion, and the test of the worthwhileness of any kind of pro- 
duction is to a large extent the effect which the consumption 
of the goods must have upon individual health, character, 
and personality, and upon national strength, efficiency and 
prosperity. The economic foundations of a country are 
laid in the ways in which consumers decide to spend their 
income. * ' We need to turn consumption, ' ' remarks Alfred 
Marshall, "into paths that strengthen the consumer and 
call forth the best qualities of those who provide for con- 
sumption." Economics can scarcely dare, in the face of 
such a challenge, to take the position that if individuals 
choose to spend their earnings foolishly, wastefuUy, or 
viciously, the effects are their own lookout and concern no 
one but themselves. Economics is obliged to address its 
study, therefore, to such questions as : What are the causes 
for the various types of demand ? Why do wants change ? 
What are the effects of different ways of spending income? 
Why are the urgent wants of some denied the means of 

1 "Principles of Political Economy," pp. 11, 455, 



348 Markets — Their Principles and Strategy 

satisfaction while the trivial wants of others are satisfied 
in full ? What are the forces which shape the standards of 
consumption ?^ 

Probably the most useful viewpoint from which to study 
consumer's wants is the psychological viewpoint. Demand 
in its multitudinous shapes and forms is fundamentally 
a psychological fact. Wants, choices, satisfactions, grat- 
ifications, desires all spring from human nature, and all 
are matters of individual and social psychology .^ 

Each consumer differs in his human equipment from all 
other consumers. His original instinctive mechanism is dis- 
tinct, his experiences in developing his original nature are 
unique, and in his beliefs, wishes, convictions and whims, 
there is no one else quite like him. He has eccentricities, 
peculiarities, and idiosyncraeies. He has an element of 
originality and individuality in his likes and dislikes. His 
preferences bear the stamp of his personality. He has an 
individual psychology. 

However, the surprising feature of the consumer's psy- 
chology is the extent to which it owes its origin and direc- 
tion to his social relations. The gradual building of the 
individual's wants and beliefs by the processes of social 
psychology is the paramount characteristic of consumers' 
demand. This process in its broadest aspects is splendidly 
stated by John Dewey as follows : * ' Mother and nurse, father 
and older children, determine what experiences the child 
shall have ; they constantly instruct him as to the meaning 
of what he does and undergoes. The conceptions that are 
socially current and important become the child 's principles 
of interpretation and estimation long before he attains to 
personal and deliberate control of conduct. Things come 
to him clothed in language, not in physical nakedness, and 
this garb of communication makes him a sharer in the 
beliefs of those about him. These beliefs coming to him as 
so many facts form his mind ; they furnish the centers about 

iSee J. M. Clark, "Economics and Modern Psychology," Journal 
of Political Economy, Volume 26, pp. 1, 136; C. H. Cooley, "Social 
Process," p. 298; J. Dewey, "Creative Intelligence," pp. 312-313, 350- 
352. 

2B. M. Anderson, Jr., "Value of Money," p. 570. 



Markets — Their Principles and Strategy 349 

which his own personal experiences and perceptions are 
ordered."^ The consumer does not form his individual 
canons of taste and style with a free and independent mind, 
nor by his purely original and detached judgment. The 
social heritage of tastes, styles, wants and demands form 
his mind, and unless the individual over-asserts his individ- 
uality to the extent of becoming a freak or fanatic, he thinks 
and plans and acts in spending his income in fairly close 
conformity with the established standards of his day and 
age. This social heritage of standards and canons is care- 
fully analyzed by William Graham Sumner in his profound 
study of the folkways and the mores of society. The 
mores are defined as "the ways of doing things which are 
current in a society to satisfy human needs and desires, 
together with the faiths, notions, codes, and standards of 
well living which inhere in those ways." And Sumner 
strongly asserts : * ' The most important fact about the mores 
is their dominion over the individual. Arising, he knows 
not whence or how, they meet his opening mind in earliest 
childhood, give him his outfit of ideas, faiths, and tastes, 
and lead him into prescribed mental processes. They bring 
to him codes of action, standards, and rules of ethics. They 
have a model of the man-as-he-should-be to which they mold 
him, in spite of himself and without his knowledge. ' ' ^ 

It is very easy to exaggerate the element of social psy- 
chology and to underrate the element of individual psychol- 
ogy in the shaping of consumers' tastes. As a safeguard 
against inferring an untrue balance between the two, it is 
important to give careful consideration to the following 
statement by C. H. Cooley: **The ordinary man is a con- 
former; he lives in the institution and accepts its estab- 
lished valuations, though not without impressing some 
degree of individuality upon them. In this way we get 
our ideas and practices regarding religion, marriage, dress 
and so on. So in pecuniary matters one accepts in a gen- 
eral way the current values, but has a certain individuality 
in his choices which makes him to some extent a special 

1 "Reconstruction of Philosophy," p. 93. 

2 "Folkways," pp. 59, 173-174. 



350 Markets — Their Principles and Strategy 

factor in the market. There is no absolute conformity; we 
do everytiiing a little differently from anyone else ; but this 
does not prevent our being controlled, in a broad way, by 
the prevailing institutions. This is what the usual economic 
analysis ignores, or perhaps omits as beyond its proper 
range. 

"Along with this we have the phenomenon of non-con- 
formity. Individuals of special natural endowment, or 
unusual situation, or both, depart widely from the type, 
and initiate new tendencies. . . . " ^ 

These cardinal principles of modern social psychology 
reveal the fallacy of considering the average consumer 
primarily as an independent individual, actuated by one 
motive only, — ^the money motive. Economics has too often 
over-simplified the consumer's psychology. Consumer's 
demand is fashioned by a host of influences other than the 
highness or lowness of price. It is not enough, in explain- 
ing demand, to state that if price is increased, demand will 
diminish, and if price is decreased, demand will enlarge. A 
varying price scale, it is true, does have its effects on 
demand, but demand is a creature of all the forces and 
influences which bear upon social and individual psychol- 
ogy. The whole instinctive nature of man figures in his 
wants and demands, and the reasons for spending his money 
as he does are as broad as human nature. Consumers' 
motives are not dollar motives alone, but all the motives of 
life. The science of spending money is then the science of 
the motives which direct the spending of money, and inas- 
much as virtually all activities and enjoyments in modern 
society require the payment of a money price, the science 
of spending money becomes in the deepest sense an economic 
study of the values and standards of the civilization of 
a certain day and age. 

The motives of consumers in spending their income are 
directed and organized by the institutions in which con- 
sumers live and work, and institutions are historical prod- 
ucts. Marketing institutions have developed from rude 
beginnings into the complicated affairs of to-day, and vary 

1 "Social Process," p. 300. 



Markets — Their Principles and Strategy 351 

from country to country in important ways because of the 
varying historical backgrounds of modern countries. Un- 
thinkingly we absorb the spirit and ideas and customs of 
our own generation, as these are filtered into our characters 
through the several stages of life by our contact with 
institutions, religious, educational, family, political, artistic, 
pecuniary, or otherwise. No matter what past stage in 
the development of any of these institutions we might pick 
out for observation, we would find, along with its admirable 
characteristics, a countless horde of institutional standards 
and values which now seem ridiculous, wasteful, humorous, 
evil, or absurd. At some time past, however, these insti- 
tutional values and canons of taste set the mold for social 
motives in spending money, and directed the channels of 
disbursement for the people who were born and brought 
up under those institutional conditions. This institutional 
influence on the social psychology of spending money is 
recognized by A. T. Hadley in the assertion that "With 
most men custom regulates their economic action more 
potently than any calculation of utility which they are 
able to make." And he adds, "It is not merely that people 
want things which hurt them or which fail to do them the 
maximum good . . . but that they buy things without 
knowing whether they want them or not." 

Now, a very large part of the customs and traditions 
built up through the processes of history are serviceable, 
efficient, and sound; but not all of them. Institutions are 
replete with influences of decay, dissipation and destruction. 
And the social psychology which is interwoven with social 
institutions is replete with wants and desires which, if grat- 
ified, lead to mental, moral and physical weakness. In 
marketing institutions, the exercise of critical judgment, 
of shrewd reasoning, of mental strategy takes place prin- 
cipally on the part of sellers, and to a much less degree, 
on the part of buyers. The managers of distribution, the 
wholesalers and retailers and speculators, usually devote a 
high degree of intelligence to the art of selling goods at a 
profit ; but the buyers, the consumers of the goods, are more 
distinctly the victims of the customs, habits, and traditions 



352 Markets — Their Principles and Strategy 

which have surrounded them from youth up. Consequently, 
the spending of money is a department of economic interest 
which is peculiarly subject to instinctive nature, and 
which is influenced greatly by the unconscious social forces 
coming from institutions. For these reasons, the spend- 
ing of money has been referred to as one of * * the backward 
arts." Money is spent for objects as a matter of course, 
because fashion, reputability, prestige, or the moral code 
calls for that sort of expenditure, and consumers are as a 
rule reluctant to submit many of their items of disburse- 
ment to critical judgment, or to decide freely and inde- 
pendently whether the fashion, the code, the canon of 
taste and the standard of reputability are good or bad. 

These abstract generalizations will be made clearer if 
some concrete illustrations are presented. When slavery 
was the established institution, supported by churrh and 
state, consumers, as a matter of course, spent part of their 
income in the purchase of slaves to perform household 
service. At the time, the social mind of slave owners 
considered the spending of income on slave servants the 
right and respectable thing to do. Later judgment has 
decreed that spending money for such a purpose was sub- 
versive of the nation's vitality and character. Again, a 
short time ago, it was the right of any man or woman to 
spend as much of his or her income as might be desired 
in the consumption of alcoholic beverages, and the indi- 
vidual consumer might consume alcohol in any form which 
he pleased, and as much of it as he pleased. As a result 
of much agitation, propaganda, and education, the pre- 
ponderant opinion of the nation declared for a prohibition 
of that form of spending income, and by a constitutional 
amendment, made it illegal to traffic in that kind of goods, 
on the ground that the consumption of alcohol was bad for 
the nation 's morals, was harmful to the health of the people, 
and was a social menace. By this change of institutional 
arrangement, consumers have been forced to divert some- 
thing like $2,000,000,000 of purchasing power into new 
channels. To take another illustration, those responsible 
foF tbe Aniericanization movement in this country are 



Markets — Their Principles and Strategy 353 

anxious to educate foreigners in our midst to spend their 
money in maintaining an American standard of living. 
Americans learn, therefore, with a feeling of alarm that 
one-half of all immigrants who come to this country later 
return to their home countries, and take with them on an 
average $2000 of spending power. Immigrants cannot be 
Americanized if they will not spend their money for educa- 
tion for themselves and their children, if they will not spend 
their money for the American standard of food, or clothing, 
or sanitation, or housing. Americanization has as one of 
its objects the inculcation of American spending habits 
into foreigners. It is a matter of concern that immi- 
grants refuse to spend for things which Americans con- 
sider essentials of life, and that they insist to so large a 
degree, upon saving their spending power for the days of 
return to their home country. Yet the social psychology 
of immigrants is intimately wrapped up with our economic, 
religious, political and educational treatment of them, and 
their spending standards are a direct outgrowth of the 
traditions and the institutions of their home countries. 

A notable institutional transformation of the last decade 
has been the widespread adoption of the eight hour day. 
This transformation involved the addition of from two to 
four hours of leisure time in the daily life of the working 
man. This has created a grave problem in consumption. 
The new leisure period, used wisely, is capable of develop- 
ing a healthier, better educated, more versatile, more artis- 
tic citizenship. But it gives at the same time an oppor- 
tunity" for the expenditure of income in riotous living, in 
showy extravagance, in vicious pleasures, and in unedifying 
idleness. Some pioneer business concerns have undertaken 
various expedients for guiding the leisure enjoyments of 
their employees along wholesome channels. Night schools, 
library facilities, community enterprises, athletic programs, 
moving pictures, are a few of the devices devoted to the 
guidance of spending power during leisure time into con- 
structive channels. By a vicious use of leisure time, the 
economic efficiency of the worker is undermined and it is 
of real concern to employers and to society at large that 



354 Markets — Their Principles and Strategy 

consumption during leisure time shall result in betterment, 
not degradation. A great many employers have found 
that the temptations to their workers to spend money for 
luncheons of pie and candy and unsubstantial foods are too 
great, and accordingly have installed company restaurants 
to provide wholesome food at reasonable prices. These 
illustrations are only suggestive of a general conviction 
among employers that it is not the consumer's own bus- 
iness alone, whether he shall spend his income wisely or 
foolishly. Workers need to be educated and inspired if 
they are to devote the proper amount of spending power 
to insurance, to the savings bank fund, to investment in 
stocks or bonds. Consumption is not a place for unrestricted 
individualism, and although the traditions of laissez faire 
have been stronger in consumption than in any other branch 
of economic interest, even there they are crumbling. When, 
during a period of high prosperity, a craze develops for 
spending money, much of it borrowed money, for high 
priced automobiles, it becomes the duty of the credit insti- 
tutions of the country to curtail borrowed spending power 
for such a purpose. The right to spend one's income as 
one pleases is no longer an unlimited right, but is amenable 
to institutional control and guidance. 

Some questions of spending income have come to hold an 
international importance. Notable in this connection is 
the cost of naval and'military armament. It is everybody's 
business how much each nation spends for armament, yet 
no one nation dares to stop the consumption of battleships 
and munitions unless all stop. The American people have 
been shocked to learn at the end of the World War that 
about ninety per cent, of their enormous national tax 
burden goes to the payment of war obligations. Yet as 
a nation, they cannot safely refrain from armament con- 
sumption, except as there is a change in international polit- 
ical institutions. Expenditure of income is guided by insti- 
tutional arrangements. 

Pecuniary expenditure needs also to be studied against 
the background of national history. Whether a people 
shall, in their food consumption, be heavy eaters of meat, 



Markets — Their Principles and Strategy 355 

or of rice, or of the grains; whether the preferred bread 
shall be of wheat, corn or rye; whether patented forms of 
breakfast cereals shall be in vogue ; whether the prevailing 
national drink shall be tea, coffee, or beer ; these and many 
similar questions vary immensely from country to country, 
and from generation to generation, and the variations are 
beset with countless customs, traditions and folkways. No 
one could hope to comprehend the standards of fashion 
among American women without tracing the traditional 
American esteem for Parisian styles. The models of Amer- 
ican furniture, and the art of spending money for the 
proper styles of furniture, cannot be understood apart from 
the periods of English history. Queen Anne, Queen Mary, 
etc. The extent to which inadequate expenditure for school 
facilities forces children to attend on part-time programs, 
and the degree to which a country begrudges its scientists 
and educators an adequate income, is plainly a matter of 
social psychology and of institutional development. The 
economic waste of spending huge sums to maintain in each 
community an excessive number of overlapping denomina- 
tional churches, and of maintaining so many idle buildings 
for so large a part of each week, cannot be understood 
apart from the denominational history of churches and 
the psychology of religious beliefs, for these forbid the 
immense economies possible through proper church fed- 
eration. The difficulties of the Interchurch World Move- 
ment, one of the greatest efforts in modern times to guide 
the spending power of the nation into humanitarian chan- 
nels, are in no small measure traceable to the tenacious 
denominationalism of churches. All of these matters pre- 
sent problems in the "wealth-using activities" of men; 
all are problems in the art of spending incomes; all lead 
back to social psychology and social history. 

The primary social unit for spending money is the family, 
and the spending of the bulk of the family income, i.e., for 
family food and clothing, is undertaken by the housewife. 
It has been estimated that about 75 per cent, of the house- 
hold purchases are made by women. The spending of the 
family income involves the selection of the most wholesome 



356 Markets — Their Principles and Strategy 

and health-giving foods for children and for adults; the 
choice of shoes, hats, and clothing with a proper regard to 
the most wear for the money spent and to the proper styles 
and fashions ; the decision between varieties of knick-knacks, 
of playthings, of patent medicines, of care of children, of 
mechanical appliances for the home, of endless goods and 
services. About each of these fields for decision in spend- 
ing the family income, there exists a heritage of rule-of- 
thumb notions handed down by grandparents as to what 
cuts of meat a person ought to buy, and the kinds of work 
the housewife ought never to hire done. There is con- 
stantly buzzing in the housewife's ears the catch phrases of 
clever advertisers who are anxious to lead the family in- 
come toward the purchase of soap because "It Floats," or 
of pickles or beans because there are **57 Varieties," or 
of patent medicine because of its color. To go near a 
modern store is to be led into a series of temptations to 
buy this, that and the other thing, and to be forgetful 
at the moment that a little later, looking backward, the 
buyer is likely to feel remorseful for yielding to the temp- 
tations. 

The whole buying process is likely to be still further con- 
fused by virtue of the fact that the spender of the family 
income has no family budget by which to apportion scien- 
tifically the items of expenditure. The disbursement is 
therefore in danger of rivalling in recklessness the expen- 
diture of a political legislature, with appropriation often 
added to appropriation by guesswork, haphazard, moodi- 
ness, personal eccentricity, community fad, and emergency 
desire. Unlike the business man, the woman, who is the 
business manager of the family establishment, is not accus- 
tomed to the methods of cost accounting, which are indis- 
pensable to the intelligent direction of any modern business, 
large or small. The average woman, therefore, has to learn 
the art of spending the family income by the expensive 
method of trial and error. Probably upwards of $30,- 
000,000,000 of family expenditure is thus carried on an- 
nually by the method of ' * fumbling through. ' ' All of this 
state of affairs is not due to any incompetency on the part 



Markets — Their Principles and Strategy 357 

of the family business managers, but rather is due to the 
traditions, customs, and modes of living which appear in 
the present day family institution. Any marked recon- 
struction in the family economy must necessarily wait upon 
the evolutionary changes in the household folkways. The 
efforts at such a reconstruction are just now in that stage 
where women's curiosity is aroused over such sciences as 
dietetics, hygiene, child psychology, household economy, 
and domestic science; but as yet a hearty acceptance of 
these sciences which throw light on higher standards of 
family consumption is checked by an intuitive feeling that 
such studies are merely the hobbies of impractical theorists. 
A forward-looking appreciation of the situation is made 
in a most sympathetic spirit by C. H. Cooley in these 
words: "It is plain also that in any plan of reform of 
values through demand, the mind of women must have a 
great part. In so far as this mind seems at present to fluc- 
tuate between conventionalism and anarchy, the cause, 
perhaps, is that it lacks the guidance and discipline that 
might come from the better organization of women as a 
social group. . . . The critical question here is, will 
women, under conditions of freedom, develop a group con- 
sciousness of their own, with high ideals of each function, 
and power to discipline the less responsible of their sex ? It 
is hard to see how modern civilization can dispense with 
something of this kind." The gradual development in 
neighborhood psychology of certain standards of household 
economy, and the institutional development of new methods 
of spending efficiency, do not seem at all impracticable, and 
it is not unlikely that a gradual evolution of a kind of pro- 
fessional pride in the management of family income will 
be realized. An indication of the profound economic and 
social significance of such a development is clear in the 
following words of Royal Meeker, whose direction of the 
cost of living studies among thousands of families for the 
United States Department of Labor has given him an un- 
usual knowledge of the facts: "The workers of America 
are obliged to live on a diet too restricted and monotonous 
for the maintenance of as high a degree of efficiency and 



358 Markets — Their Principles and Strategy 

health as ought to be maintained as a reasonable minimum. 
I am of the opinion that the most efiScacious remedy is not 
higher wages, but rather improved systems for distributing 
and marketing foodstuffs, and the education of house- 
keepers in the art of keeping house, with emphasis on diets. 
Housekeeping is not exactly a lost art. It is one of the 
arts that has not yet been completely found. "^ 

The economics of consumption leads- also to an analysis of 
the stratification of society into classes. Every one is aware 
of the existence of certain clearly defined levels of income 
and spending power in modern society, and these have been 
statistically outlined in the chapter on Ownership. The 
sharpest contrast between classes is obvious when the ex- 
tremely rich and the extremely poor are put side by side. 
In between these extremes are all gradations, — unskilled 
workers, skilled workers, teachers, lawyers, doctors, engi- 
neers, executives, financiers, and a fairly wealthy leisure 
class. "Our standard of decency in expenditure ... is 
set by the usage of those next above us in reputability ; 
until, in this way, especially in any community where class 
distinctions are somewhat vague, all canons of reputability 
and decency, and all standards of consumption are traced 
back by insensible gradations to the usages and habits of 
thought of the highest social and pecuniary class — ^the 
wealthy leisure class. ' ' ^ The classes with the lesser incomes 
make up the mass of the population, but their standards of 
taste, style, and pleasure are derived, directly or indirectly, 
from the classes with the greater incomes. The population 
at the base of the pyramid draws its customs and ideals of 
spending money from the group at the apex of the pyramid. 
Hence, the people of large incomes as a class exercise an 
influence upon styles and standards of living altogether out 
of proportion to their numerical importance. They are the 
models among consumers, envied by the other social classes, 
and to as large an extent as possible, imitated by other 
social classes. What they buy, everybody wants to buy; 

1 "What is the American Standard of Living?" Monthly Labor Re- 
view, Vol. IX, p. 5. See, also, on this whole problem, "The Backward 
Art of Spending Money," by W. C. Mitchell. 

2T, Veblen, "Theory of the Leisure Class," p. 104. 



Markets — TJieir Principles and Strategy 359 

■what they consider taboo, everybody inclines to consider 
taboo. 

The pathways of entrance to this class are open to all 
comers. The inheritance of fortune places not a few people 
there, but there are constant accessions of successful busi- 
ness and professional men and women who have worked 
their way from the bottom to the top, from speculators 
whom luck has favored, from small tradespeople who have, 
by a lifetime of work and saving, made the necessary prop- 
erty accumulation. Thousands of accessions have occurred 
among those who are rather loosely and often inaccurately 
called the * * war-made millionaires. ' ' But it takes a genera- 
tion or so for newcomers to become assimilated into all the 
manners and conventions of the most influential class. 
There is usually a difference, obvious enough and many 
times humorous, between the nouveau riche and those 
"bom to the purple." The latter class inherit not merely 
the income proper to the class, but also the bringing up in 
a home and community environment which assures that 
from youth up, their breeding will make it natural and 
easy for them to embody the virtues, traditions, forms, 
canons and standards of the class. A historical examina- 
tion of the origins of a goodly portion of these class stand- 
ards of consumption would lead back to the institutions of 
Europe, — ^the Europe of courts, estates, barons, counts, and 
kings. It is not easy for interlopers to orient themselves 
overnight in this historical background, and to behave 
gracefully in the midst of the new class psychology. The 
parvenu is notoriously clumsy and absurd in his attempts 
to adapt himself to the ways of the class, and not infre- 
quently makes a ludicrous botch of the attempt. It is neces- 
sary then to conceive of this class which more than any 
other sets the canons of consumption as an institution in 
itself, with class traditions and class psychology, with a con- 
tinuity unbroken from generation to generation, with a 
class self-consciousness and a distinctive group self-asser- 
tiveness. 

The motives in the consumption of all goods, whether by 
the most well-to-do or the less well-to-do, are guided by two 



360 Markets — Their Prmciples and Strategy 

aspects of the goods. On the one hand, there must be a 
certain base line of plain food value to satisfy primitive 
hunger; a certain minimum of warmth-giving quality or 
body-covering quality in all forms of clothing; a certain 
indispensable protection from the elements in all forms of 
housing; a certain serviceability in all forms of furniture; 
a certain minimum of plain, simply utility to sustain life 
and satisfy the imperative human wants. But on the other 
hand, all consumption except the rarest and crudest, re- 
quires in the food, clothing, housing, furniture and the like, 
a substantial element of style, fashion, culture and taste. 
This element in all consumption is in part of course a con- 
cession to the artistic cravings of the human spirit, but in 
ordinary life it is probably much more an expression of the 
profound human bent to ape the standards of consump- 
tion which command prestige and admiration. Goods are 
bought, then, partly for the service which they will give to 
the user, but also for the extent to which they will give the 
satisfaction that comes from being in style. As incomes 
increase, the search for elements of style and prestige be- 
comes greater and greater, until the upper limits of lavish 
display of wealth are reached. "When the charge is made 
that what troubles people is not so much the high cost of 
living as the cost of high living, what is really implied is 
that people are spending their incomes for the style, showi- 
ness, display of goods more than for their direct service- 
ability. 

Style and display follow standards which hold sway 
among the most well-to-do. And among the most well-to- 
do, those who constitute the so-called leisure class really set 
the pace for consumption standards. To a very large de- 
gree, the standards which prevail there refer to extraordi- 
nary luxury, to impressive expensiveness, to costly leisure, 
to a rapid fluctuation of vogues, modes and styles. The 
extravagance of the poor, the race to "keep up" with one's 
set, the desperate determination to buy those things which 
are expected of one in one's position, the prudence of an 
ever-growing proportion of the higher income classes in 
refraining from having children lest the extra expense 



Markets — Their Principles and Strategy 361 

might require the giving up of the most flattering standard 
of living, — all this has to be studied as a part of the insti- 
tution of social classes. The instincts expressed in display, 
prestige, social approval, distinction, and reputation, are 
the driving human forces behind all such spending stand- 
ards ; and the tendencies toward imitation, habit formation, 
suggestibility, and erowd-mindedness are the directing in- 
fluences in these phases of consumers' behavior/ 

In the face of these psychological forces, the frugal vir- 
tues make discouraging headway. As Thorndike remarks, 
"There are working against thrift, the very strong original 
tendencies toward gratifying the gross sensory appetites, 
and toward display, mastery and approval." Thrift can- 
not be made to appeal to the imagination of the masses 
forcibly except as they are tempted to imitate thrift on the 
part of the classes which command prestige. Precisely be- 
cause "the habit of aping the expenditure of those better 
off than ourselves is pathetically general,"^ it is true that 
the formation of new habits of aping the economy and 
thrift of those better off than ourselves is the only broad 
road to successful thrift. Hence, the admonition of Thorn- 
dike is thoroughly constructive: "Thrift should then be 
begun with the rich, important, able, and popular. So 
long as it is advocated as the virtue of the poor and lowly, 
the young and struggling, the propaganda will be largely 
self-destructive. ... If the world as a whole is to be effi- 
cient, its mighty ones must distinguish sharply between 
expense for efficiency and expense for display, and leave the 
latter to peacocks, monkeys, the feeble-minded and women 
who have to make themselves salable."^ The institution 
of social classes, therefore, controls frugality as well as 
extragavance. Genuine thrift among the masses must wait 
until conspicuous thrift and saving are as prominent among 
the classes of greatest income as conspicuous luxury and 
waste often are at the present day. 

1 See Cooley, "Social Process," pp. 303-334 ; Carver, "Principles of 
Political Economy," pp. 48-49; Sumner, "Folkways," pp. 45-47. 

2 Hartley Withers, Annals of the American Acadenny, Vol. 87, p. 
231. 

3 E. L. Thorndike, "Psychological Notes on the Motives for Thrift," 
Annals of the American Academy, Vol. 87, pp. 213-218. 



362 Markets — Their Principles and Strategy 

Technology for Guidance of Consumption 

There are three main methods in vogue for the control 
and shaping of consumers' demands and expenditures, — 
private business agencies, consumers' co-operative agencies, 
and political agencies. 

The first of these, private business agencies, has already 
been discussed at length in the section on demand creation, 
advertising, and salesmanship. Business men do not trust 
to consumers to buy what they please, but at no small ex- 
pense they carry on advertising and selling campaigns to 
control the channels in which consumers shall spend their 
incomes. 

The second agency, consumers' co-operative adventures, 
are the outcome of the feeling of the individual consumer 
that he is utterly helpless. He buys what he finds in the 
stores, pays the price which he has to, and comes away 
with the feeling that he is at the mercy of some market 
juggernaut. Consumers' leagues and co-operative stores 
have been undertaken, but as yet have not been applied on 
nearly so wide a scale as they have in a number of Euro- 
pean countries. Consumers' co-operative efforts have demon- 
strated their efficacy and are strongly significant as an in- 
dication of the feeling of protest in the minds of large 
numbers of consumers, and of the desire to assert their in- 
dividual wants by a collective agency. 

The third agency, political and legislative control, is 
highly important. A recent writer on political science has 
observed, "Politics is becoming the chief method by which 
the consumer enforces his interests upon the industrial 
system. . . . Business, then, must look forward to increas- 
ing control in the interests of those who buy. Processes 
will be inspected, and regulated by law, some industries will 
be operated directly by the government."^ One of the 
foremost political interferences with consumers' expendi- 
ture is the method of taxation. Inheritance taxes, income 
taxes, excess profits taxes tend to divert a considerable 
share of large incomes into public uses, and consumption 

iW. Lippman, "Drift and Mastery," pp. 71, 75. 



Markets — Their Principles and Strategy 363 

taxes, indirect taxes, tariffs and imposts tend to appro- 
priate relatively larger shares of the incomes of the mass 
of people to public uses. A great number of bureaus, main- 
tained by federal, state, and municipal authorities, are 
devoted to education of people to wise use of income. Public 
Health Bureaus, Cost of Living Commissions, Children's 
Departments, Welfare Committees, Marketing Bureaus, 
and other like bodies, are engaged in publicity, propaganda, 
and organizing activity for the purpose of improving con- 
sumers' demand. Municipal parks, playgrounds, beaches 
and libraries are created to make it easy for people to spend 
their income for leisure enjoyments in as wholesome a man- 
ner as possible. Legislation is common to prevent people 
who by nature are easily gullible, from falling the victims 
of wild-cat adventures in stock speculation and of swindlers 
of every sort. Laws are on the statute books against the 
spending of money in gambling, lotteries, and games of 
chance. In various forms there has come into being a body 
of political agencies to encourage the intelligent and bene- 
ficial spending of money, and to discourage or to forbid 
foolish and harmful spending. 

Consumers' demands, when viewed from all these points 
of view, is not a settled and finished fact, immune from 
criticism, and entitled to unbridled laissez faire. The using 
of wealth is the end and aim of the producing of wealth, 
and if it is used badly, its production to begin with was a 
waste and a futility. All too widespread has been the 
assumption that anybody was justified in making poor 
goods, or goods which could only bring harm to the con- 
sumer, provided he was clever enough to find buyers; and 
that if the buyers were foolish or ignorant enough to buy 
such goods, it was their own fault, and they deserved to 
suffer the consequences. Nobody was supposed to be his 
brother's keeper in any affair which touched the spending 
of his brother's income. Maximum production has been 
extolled as the supreme virtue without much concern as to 
what it was that was to be produced. Hence much pro- 
duction has been of a sort that degraded men in the con- 
suming. It is encouraging therefore that the tendency is 



364 Markets — Their Principles and Strategy 

appearing positively to treat the spending. of income as a 
province wherein the methods of scientific analysis apply. 
Only by knowing why consumers behave as they do, and by 
understanding how their behavior can be redirected advan- 
tageously, can the modern economic community acquire an 
intelligent self-control. 



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Emery, H. C: The Tariff and the Ultimate Consumer; Amer- 
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COMPTON, W. : Price Problem in Lumber Industry, American 
Economic Review, Vol. 7; p. 582 

Wright, P. G.: Value Theories Applied to Sugar Industry, 
Quarterly Journal of Economics, Vol. 30, p. 101 

ToSDEL, H. R.: Open Price Associations, American Economic 
Review, Vol. 7, p. 331 

BoYLE, J. E.: Marketing of Agricultural Products, American 
Economic Review, Vol. 11, p. 207 

Clark, F. E. : Criteria of Marketing Efficiency, American Eco- 
nomic Review, Vol. II, p. 214. 

Taussig, F. W.: Price Fixing, Quarterly Journal of Economics, 
February, 1918, p. 240 ff. 



Markets — Their Principles and Strategy 365 

Simpson, Kemper: Price Theories, Quarterly Journal of Eco- 
nomics, Vol. 35, p. 287 ff. 

HiGHAM, C. F.: Scientific Distribution 

Putnam, G. E.: Journal of Political Economy, Vol. 29, p. 297 ff. 

Veblen, T.: Theory of the Leisure Class 

Cherington: Elements of Marketing 

CoOLEY, C. H.: Social Process 

Tipper and others: Principles of Advertising 

Whitehead, H. : Principles of Salesmanship 

IVEY, P. W.: Elements of Retail Salesmanship 

Kitson, H. D.: The Mind of the Buyer 

Weld, L. D. H.: The Marketing of Farm Products 

Macklin, T.: Efficient Marketing for Agriculture 

Shaw, A. W. : Some Problems in Market Distribution 

Douglas, Paul and Dorothy, and Joslyn, C, S.: What Can a 
Man Afford? American Economic Review, Sup. 2, Decem- 
ber, 1921 

Friday, David: An Extension of Value Theory, Quarterly Jour- 
nal of Economics, Vol. 36 ff., 197-220 



CHAPTER X 

MONEY AND CREDIT: THEIR SERVICES AND DANGERS 

The universal unit of measurement for the elements of 
the economic order is money. The language of business 
is always dollars and cents. Labor works for a money 
wage, capital invests money for a money return, manage- 
ment assembles all the factors of production in terms of 
money costs and money gains, the market buys and sells at 
a money price, finance is the institution of money itself. 
Every business element has to be translated into terms of 
dollars and cents before business men can calculate about 
profit or loss. The various steps and particles of the eco- 
nomic system must have a money price tag placed upon 
them before they can play a part in economic life. By 
thus reducing economic elements to a common language the 
money unit of measure serves as a great unifying and or- 
ganizing factor in economics. 

A price system exists when all economic services, com- 
modities, or transactions are measured in value by some 
medium of exchange. The assortment of specialized serv- 
ices, tasks and functions has become so vast and intricate 
only because each separate item could be brought within 
the comprehensive price regime. In most modem coun- 
tries, these units of money price are such as the dollar, the 
pound sterling, the franc, the mark, etc. In an economic 
system based upon money prices, all economic activity has 
to be reduced to a price term. This fact makes possible the 
minute subdivision of labor, the division of tasks, the use of 
machinery on a large scale and the consequent increase of 
production. 

Note — ^The purpose of this section is not to give a technical ac- 
count of the detailed processes of banking and exchange, but to 
describe some of the main elements in the structure of money and 
credit institutions. The subject involves many intricacies and much 
detailed analysis, and it is difficult to sort out those central and 

366 



Money and Credit 367 

basic elements which give a substantially true and accurate descrip- 
tion, a description which is brief yet adequate to enable the student 
to grasp the important problems of finance. The effort has. been 
made, however, and it is hoped that the account of the financial insti- 
tution will be, in spite of the unavoidable condensation and brevity, 
sufficiently comprehensive to give the student his financial bearings 
in his economic thinking. 

The far-reaching consequences can best be understood 
only after the chief money instruments are clearly in mind, 
and their functions are understood. 

The precious metals have been important money mate- 
rials in the development of modern price systems, and the 
most important of the metals has been gold. In the United 
States at present, 23.22 grains of pure gold enter into the 
dollar. For coinage purposes, a copper alloy is used, so 
that the actual dollar contains 25.8 grains of gold nine- 
tenths fine. An act of Congress definitely establishes that 
amount of gold as the content of the dollar. Likewise any- 
one holding a dollar in any form of money holds the equal 
of 23.22 grains of pure gold. If a person has the raw gold 
he can take it to the United States Government and have it 
converted into gold coins. This free coinage insures that 
the ratio between the value of the gold as raw metal and 
the value as money coin shall remain constant. Free coin- 
age exists for gold alone and for no other metal in this 
country, and this exclusive right of gold is the factor which 
establishes gold as the single standard of value in our price 
system. 

The advanced economic systems of the present time are 
organized under a price system upon the principle of the 
single standard. A century ago, only one country, Eng- 
land, had adopted the single standard, but within the 
century the new principle has received wide acceptance. 
The alternative was bimetallism, in which gold and silver 
usually were the standard metals. The reason for the gen- 
eral abandonment of the bimetallic standard appears in the 
experience, for example, of the United States. The Ameri- 
can bimetallic system began by establishing free coinage of 
both silver and gold at the ratio of 15 to 1. That is to say, 
one ounce of gold would be coined into the same amount of 



368 Money and Credit ^ 

money as fifteen ounces of silver. But gold proved to be 
worth more for other purposes than in coins, with the result 
that very little gold was brought to the mints for coinage 
purposes. The ratio was therefore changed to 16 to 1/ but 
under the new ratio it was found that it paid the holders 
of gold to coin their metal whereas it did not pay the hold- 
ers of silver. Silver was worth more as bullion in the open 
market than in coins, and hence very little silver found its 
way to the mints. The coinage ratio between the two metals 
could not be made to correspond with the actual market 
ratio. Wherever the bimetallic standard is tried, this diffi- 
culty gives rise to what is known in economics as Gresham's 
law, namely, that when the market ratio of the bullion of 
the two metals does not correspond with the nominal ratio 
of coinage, the metal overvalued at the mint will tend to 
drive the other from circulation. The free coinage of silver 
was abandoned in the United States in 1873. Two subse- 
quent acts of Congress, the Bland Allison act of 1878 and 
the Sherman Act of 1890, authorized the coinage of a lim- 
ited amount of silver under certain restrictions. The 
United States has, by Act of Congress, been definitely under 
the single gold standard since 1900.^ 

Gold is therefore the standard of value in the price sys- 
tem. A bushel of wheat is compared in value with a pound 
of tea by comparing the amounts of gold for which each 
will exchange. The money price is the index of the eco- 
nomic value of any service or commodity or piece of prop- 
erty in relation to all other services, commodities and 
properties. The value of anything and everything is meas- 
ured by comparison with the standard gold dollar, and this 
standard is the universal unit of economic measurement 
throughout the price system. 

Subsidiary Metallic Money 

There is a subsidiary or token metallic money which cir- 
culates and performs the services of purchase and sale, and 

1 16 to 1 is approximate; the exact ratio is 15.988 to 1. 

2 Except for certain special legislation permitting limited coinage 
of silver, the United States has been on a gold basis since 1873. 
Bimetallism is now mainly a matter of historical interest. 



'Money and Credit 369 

which is accepted in payment because it is redeemable in 
gold. We have in the United States, for example, the silver 
dollar, the half-dollar, the quarter, the dime, the nickel and 
the one-cent piece. None of these coins contains actual 
raw silver, nickel, or copper equal in value to the figure 
stamped on the face of the coin. If the coins were melted 
and the bullion sold in the metal market, the selling price 
would be only a fraction of the face value which they are 
given in the coin. Yet they circulate freely, the reason 
being that they are redeemable in gold at their full face 
value and that they are legal tender up to certain amounts. 

Those forms of money are legal tender which the law 
requires people to accept in payment of debts. Gold is 
legal tender in any amount, but the subsidiary coins in only 
limited amounts. An exception must be made of silver dol- 
lars, which are legal tender in any amount, except when 
otherwise stipulated in a contract. The smaller silver coins 
are legal tender to the amount of ten dollars, and nickels 
and pennies to the amount of twenty-five cents. The metal 
coins must be accepted in payment of contracts or debts to 
these amounts. 

The inconvenience of carrying heavy and bulky coins is 
obviated by the use of various forms of government paper 
money. In popular knowledge, this paper money is simply 
the dollar bill, the five-dollar bill, and bills of other 
amounts. However, the paper bills have different origins. 
Some are gold certificates, with a dollar of gold reserve in 
Government vaults for every dollar of paper. Some are 
silver certificates, with a silver dollar in reserve in Govern- 
ment vaults for each paper dollar in circulation. The 
paper money is redeemable in metal coin on demand, and 
is legal tender in the same way as the respective coin. 

"We have also as paper money government notes which 
are not backed by a metal reserve equal to the full face 
value of the notes. The partial reserve is practicable be- 
cause only a fraction of the paper bills will be presented 
for redemption at any one time. Legally, the full issue of 
paper money is convertible into specie, but this legal pro- 
vision is made only because in actual practice the Govern- 



370 Money and Credit 

ment is called upon to redeem only a small amount at a 
time. Treasury Notes of 1890, redeemable in gold coin, and 
the so-called greenbacks issued during the Civil "War, re- 
deemable likewise in gold coin are paper money issues of 
this partial reserve type.^ 

A third type of paper money is sometimes resorted to, 
namely fiat or inconvertible money. Government paper 
money of this type has no reserve of metal, not even a par- 
tial reserve. It is not redeemable in any standard of value. 
The United States at present has no fiat money in circula- 
tion. The greenbacks when first issued were fiat paper 
money, and the fact that they were not redeemable caused 
their purchasing power to depreciate far below their face 
value. When they were made redeemable in 1879, their 
purchasing power rose to the par of the face value. Most 
Governments are disposed to avoid fiat paper except in case 
of war emergency. Germany floated huge inconvertible 
paper issues during and following the World War. The 
war inflation in England 's currency has undermined the re- 
lation between her paper money and gold reserves, and has 
left her, for a time, at least, on an inconvertible basis. The 
Russian Bolshevik Government in 1920 had already issued 
in Russian money an equivalent of eighty billion dollars in 
irredeemable paper money. Continental Europe at the end 
of the war was, in general, using money which could not be 
redeemed in the gold standard. The situation would ap- 
pear, however, to be temporary and Europe appears likely 
to attempt to get back to a redeemable standard gradually 
and ultimately. The fiat principle does not commend it- 
self as safe and acceptable to the modern capitalistic eco- 
nomic systems. 

In the United States to-day, therefore, all forms of money 
issued by the Government refer to gold ultimately as the 
standard of value. The money forms have general accept- 
ability in price transactions. Also they are legal tender 
by Government authority and are backed ultimately by 
gold reserves. Obviously the value of the gold in the dollar 

1 See pp. 406-411 for forms of paper money under Federal Reserve 
Banking System. 



Money and Credit 371 

thus stands as the unit standard of value for the measure- 
ment of all price relations, and directly or indirectly, 
through the various subsidiary and paper money instru- 
ments, the money medium of the price system is main- 
tained. 

Although these forms of money establish a standard of 
value for the price system as a whole, nevertheless they 
constitute only a very small part of the actual medium of 
exchange. About nine-tenths of all business transactions 
take place without the circulation of any of these money 
instruments. The great bulk of business is done by credit 
instruments. Credit allows people to secure goods now and 
to pay for them later on. It means essentially the same 
process as borrowing. A seller trusts a buyer for payment 
in the future. Or a buyer pays a seller immediately with 
money borrowed from a bank to be repaid later. The va- 
rious instruments for the application of the principle of 
credit serve the huge majority of all price transactions. 
In the forepart of the last century, credit was of small 
importance, but to-day it is of dominating 'importance 
throughout the price system. The credit system is a recent 
creation and has come about in response to the pressing 
needs of the highly specialized economic system resting 
upon machinery and applied science.^ 

Banking institutions have developed as agencies for the 
handling of credit and money instruments. The paramount 
attention of commercial banks is devoted to the operation 
of the credit system. Not all banks are commercial banks. 
Some are investment banks, some are savings banks, some 
are trust companies, etc. But the banks of central im- 
portance in the conduct of credit operations are the com- 
mercial banks, and hence the following description of the 
relation of commercial banks to credit control should be 
understood as a description at the outset of the pivotal part 
of credit institutions. This does not mean that all commer- 
cial credit passes through the hands of bankers, but inas- 

1 See Scott, "Money and Banking," 1916, pp. 92-94; also Laughlin, 
"Credit of Nations," pp. 8-12, and Chapter II; and H. G. Moulton, 
"Financial Organization of Society," Chapter IX. 



372 Money and Credit 

much as most commercial credit does involve banking opera- 
tions, it will be clearer and more accurate to study commer- 
cial credit in connection with commercial banks, and 
incidental forms of commercial credit which do not involve 
banking can be noted adequately in passing. 

Commercial credit may be classified in three major forms, 
namely, open accounts, promises to pay, and orders to pay.^ 

Open accounts are often called book accounts, and take 
place with or without banking activities. An example of 
open accounts carried on without the direct aid of a bank 
is the very familiar process of "charging" goods bought 
from a grocery store. The grocer keeps on his books a 
record of all goods bought by each customer, and at regular 
intervals, probably every month, balances up the total price 
of the goods bought and the total amount of payments made 
by the customer during the month. The balance owing the 
grocer is then paid, possibly in money, more often in the 
form of a check drawn on the customer's banking account. 
If checks are used, then a process of open accounts with a 
bank is involved. The customer pays most of his bills, 
grocery and otherwise, -by checks, and at the same time he 
is constantly receiving cheeks from people who owe him in 
settlement of their debts. These checks which he receives 
from others he deposits from time to time at the bank. The 
books of the bank make a record of all that the man de- 
posits and all that he draws out, and from time to time the 
bank gives him notice of the balance. A large part of the 
purchases of retail dealers from jobbers are financed by 
book credit. The jobber carries the retailer's account on 
his books for a certain period of time. This open account 
is in the nature of a loan to the retailer for the period in- 
volved and is a common form of credit. 

Promises to pay take many forms, such as promissory 
notes, bank notes, or government notes. The government 
paper money already described is in the nature of a promise 
by the Government to pay on demand gold or other stand- 
ard money. Banks are allowed to issue notes for circula- 

1 Scott, "Money and Banking," p. 95 ; Moulton, "Financial Organi- 
zation," p. 163. 



Money and Credit 373 

tion, which are similar promises to pay to the bearer on 
demand a certain sum of money. A promissory note is a 
person's signed legal promise to pay at some future date a 
certain sum to another party. Most promissory notes are 
settled eventually not by the passing of specie or Govern- 
ment paper money, but by further credit devices. For 
instance, a check is drawn in payment, and the person re- 
ceiving payment deposits the check at the bank, where it is 
recorded in the regular process of accounting by the bank. 
The third form of commercial credit, the order to pay, is 
commonly known among business men as the bill of ex- 
change or draft. Suppose a wholesale merchant sells to a 
retailer $10,000 worth of shoes. The retailer cannot pay 
cash, — in fact he cannot pay for the shoes until he has in 
turn sold them to his customers. The wholesaler must wait 
for his payment until the retailer has had a chance to sell 
a large part of the shoes. To take care of the deferred pay- 
ment, the wholesaler writes out an order to the retailer to 
pay to him ten thousand dollars at the end of a stated 
period, perhaps three months. This order to pay is a credit 
instrument. The principle and method involved have very 
wide applications in business. The variety of applications 
will be explained more fully later in the section on banking. 

Banking and Commercial Credit 

Production, wholesaling, retailing, transportation, all are 
directly dependent upon borrowing in some form for their 
activities. The commercial credit operations of banks pro- 
vide such loans for borrowers, and this is the paramount 
function of modern banks. 

This assertion that banks exist primarily for the purpose 
of lending money does not square with a widespread popu- 
lar notion of banking. The popular conception often seems 
to be that a bank is a place to put money for safe keeping, 
perhaps to draw a small rate of interest. A bank is thought 
of as a place where anybody's surplus cash can be de- 
posited. Bank deposits are thought of as money put into a 
bank. It is true that this storing of money is an important 
function of banks, but under the modern price and credit 



374 Money and Credit 

system, a new function has developed which overshadows 
the old in importance. Under the new function, a bank 
deposit is not necessarily money which a customer has put 
into the bank, but is a borrowing from the bank. At first 
thought, it seems paradoxical to consider a loan made by 
the bank as a deposit in the bank. The apparent contra- 
diction gives rise to real difficulty in understanding the 
great service which banks render to the business community 
through deposit currency, i.e., loans.^ 

The loan involves a sum drawn out of the bank for a 
period of time and a sum put into the bank at the end of 
the stated period of time. The loan always involves the 
assurance that at a specified date the borrower will return 
the amount of the loan to the bank. Hence, immediately 
and during the period of the loan, the amount of the loan 
is assigned to the borrower, but at maturity the amount of 
the loan is something coming into the bank. The loan in- 
volves a promise to pay into the bank at the date of ma- 
turity the sum specified. This assured payment into the 
bank is therefore rated as a deposit. The bank always has 
as much coming in as the amount of loans put out with 
borrowers.^ Hence loan deposits are on the one hand what 
is due the borrowers to be supplied by the banks and on the 
other hand what is due the banks from the borrowers when 
the loans are paid up. 

As explained in the Federal Reserve Bulletin, "The 
naive idea that a bank deposit normally originates by the 
bank's customer making a deposit of cash in the bank does 
not reveal the substance of the situation in countries like 
the United States, with a highly developed system of bank 
credit and its utilization through the form of the deposit 
account. The most usual form in which bank deposits orig- 
inate is by borrowers going to a bank to seek accommodation 
and offering their notes for discount, the bank making the 
loan sought by the customer by opening a credit or "de- 
posit" on its books in the borrowers' favor. Normally, 

1 See I. Fisher, "Purchasing Power of Money," pp. 32-47. 

2 Also the bank has interest, or discount, on the principal of the 
loan. 



Money and Credit 875 

therefore, what are called deposits, increase as loans and 
discounts do; in other words, as borrowings from banks 
increase."^ 

Deposit currency is the chief creation of commercial 
banking and a clear conception of its workings is essential 
at the outset. Deposit currency has come in recent years 
to make up about nine-tenths of the actual currency circu- 
lation of the country. 

Deposit currency is a substitute for the old forms of 
money. The new form has come into being because it has 
been found more convenient for business men to use. It is 
created in the following manner: A bank has to begin 
with a certain amount of money as a foundation. The 
capital stock represents money paid in, the bank building 
has a real estate money value, a number of people in the 
community have left money with the bank for safe keeping. 
Suppose the total of all such resources amounts to $1,000,- 
000. What is the lending power of the bank ? Is it $1,000,- 
000 ? As a matter of fact, its lending power is much more 
than that amount. The total amount which the bank can 
lend exceeds many times over the total amount of cash and 
money which the bank possesses. This, too, seems paradox- 
ical, for it will be asked, how can a bank lend that which it 
does not have? If the total funds owned by the bank are 
only $1,000,000 how can it lend more than that amount? 
The device of deposit currency accomplishes the task. 

A deposit loan is a loan which gives the borrower a right 
to draw actual money from the bank, with the tacit expec- 
tation and understanding that as a matter of real practice, 
the borrower will not assert the right and will not draw the 
actual money out. Instead of asking for the actual money, 
the borrower will use the loan by writing checks. To make 
the transaction concrete, a definite example may be as- 
sumed. Suppose the Baldwin Locomotive Company, the 
New York Central Railroad, aj^d the Bethlehem Steel Com- 
pany each borrows $1,000,000 from the National City Bank 
of New York City. The total loan made by the National 
City Bank would be $3,000,000. Assume that the New 

1 September 1, 1919, p. 815. 



376 Money and Credit 

York Central orders $1,000,000 worth of locomotives to bo 
made by the Baldwin Locomotive Company, and that the 
latter buys $1,000,000 worth of steel for its needs from 
the Bethlehem Steel Company, and the steel company buys 
$1,000,000 worth of raw metal for its needs. How are 
the accounts settled? The railroad company may write a 
check on the National City Bank ordering the bank to pay 
the amount of the $1,000,000 loan to the locomotive manu- 
facturers. The bank thereupon transfers on its records 
that sum to the account of the Baldwin Locomotive Com- 
pany. Meantime the Baldwin Locomotive Company meets 
its debt to the steel company by writing a check on the 
National City Bank for the amount of $1,000,000, and on 
the records of the bank that amount is transferred to the 
name of the Baldwin Company. In the same way, the Beth- 
lehem Steel Company meets its debt by writing a check on 
the bank, as a result of which its loan of $1,000,000 is put 
on the account of the corporation with which it is doing 
business. The paramount feature to notice is that money 
has not been passing around directly through the hands of 
the three big corporations. They did not see, or want, or 
ask for gold or silver, or dollar bills. These money forms 
did not actively enter into the transaction. Nor need the 
bank have had in its vaults $3,000,000 to back up the trans- 
action. A fraction of that amount in actual money would 
be all that was necessary. The deposit loan would be car- 
ried by transferring the ''right to draw money" from the 
name of one corporation to the other. The actual money 
would never be touched. By the use of checks, the bor- 
rowers could direct the bank to transfer the right to the 
money to other parties, and the banks could record the 
transfer as a matter of book accounting. The actual money 
would not be moved. 

It is natural to wonder, then, what would happen if the 
various borrowers should all go to the bank at once and 
demand actual money. The bank has given them one and 
all a right to claim actual money, and yet the bank does not 
possess anything like the full amount itself. What would 
happen if all these borrowers should ask for gold and silver 



Money and Credit 377 

and dollar bills? The answer is that the whole banking 
and credit system is built upon the tacit understanding that 
the borrowers will transact their business by check and will 
never really draw the actual money called for in the loan. 
This broad understanding is the very foundation of com- 
mercial banking, and the custom of banking and commerce 
has become so firmly established that the understanding is 
as much a dead certainty as any fact in economic life. At 
any one time, only a few borrowers will ask for actual 
money. The great mass of loans are in the form of a paper 
statement, and the use of the amount mentioned in the loan 
is made by checks instead of by the actual passing of 
money. The deep confidence that all borrowers will not 
ask for actual money at once makes possible the carrying 
of loans by the bank much above the actual cash resources 
of the bank. 

In the foregoing discussion, the general principles have 
been mentioned, but no statistical estimate has been made 
of the possible ratio between cash resources of all the banks 
of the country and the deposit loans as a total. The cur- 
rency statistics of the country indicate that the cash re- 
sources of the whole banking community may be as small 
as about one-twentieth of the deposit currency. The lend- 
ing power of the whole banking community is at the maxi- 
mum about twenty times as great as its cash resources. Of 
course, the lending power is not always used to the maxi- 
mum. This deposit currency is credit, and by this agency 
the countless transactions of the business community go 
forward, and the price system functions.^ 

There are then two major forms of deposits: First, 
funds actually put into the bank by customers, and, second, 
funds borrowed from the bank by customers ; of these two, 
the borrowed funds constitute the great bulk. Both types 
of deposits are handled for the most part by checks. Checks 
are quicker, handier, easier. They can specify any odd 
amount of dollars and cents, as, for example, $1756.79, with- 

1 For the country as a whole, the percentage of ca&h reserve to 
total deposits varied from 11.7 in 1913 to 6.6 in 1919. See E. W. 
Kemmerer, "High Prices and Deflation," p. 28. 



378 Money and Credit ^ 

out the nuisance of counting out that amount of money. 
They can be duplicated if lost, and they can be made pay- 
able to particular persons. In the United States, checks are 
used in making over 90 per cent, of all payments. They 
simplify the vast array of price transactions, and facilitate 
business exchanges to the amount annually of about $250,- 
000,000,000. They are the natural instruments for the 
working of the deposit loan system of credit payments. 

This explanation of deposit currency has been made thus 
far primarily from the standpoint of the banker, but for 
fuller clearness an explanation should be made also from 
the point of view of the customer of the bank. "When the 
business man or the corporation carries a deposit with the 
bank, — a deposit of the type which involves not a loan but 
the placing of funds in the bank's keeping, — the fund is 
used to meet a wide variety of bills and expenses in the 
business. The business man may desire to pay a dozen 
different concerns for raw material bought from them; he 
may desire to pay a score of bills incurred for working 
capital; he may desire to meet his regular payroll for 
labor ; and he may pay them one by one by means of checks. 
At the same time, the business man has payments coming 
to him from those who owe him money. He is constantly 
receiving checks from other business men in settlement of 
their debts to him. As these come in, he turns them over 
to his bank to be recorded on his account. The bank serves 
as a kind of clearing office for the two streams of payments, 
the payments going out and the payments coming in. At 
certain intervals, the bank supplies reports of the amounts 
of each, and gives a record of the balance. The scores of 
business men being paid by the customer and the scores of 
others who are paying him what they owe him, are using 
for the most part checks based on bank deposits (or other 
credit instruments, such as drafts, bills of exchange, accept- 
ances, etc., which will be explained later). Actual money 
is not being passed from hand to hand. Credit instruments 
enable the banker to adjust the accounts of the business 
man by recording the balance of receipts over expenditures. 
The checks show who would be entitled to the actual cash if 



Money and Credit 379 

a showdown were demanded, and the bank were to be called 
upon to pay up with the money itself, and these cheek 
records make possible a book account in the bank showing 
what the customer has paid out by writing checks and what 
he has received by cashing checks received from others. 
The process of accounting and of balancing the two streams 
of payments without the actual circulation of money itself, 
economizes the use of money, makes the system of price 
transactions easier and simpler, and points to the bank as 
an indispensable servant of business men. 
. The question arises, therefore. How is the bank paid for 
rendering such services? The banker has to make a profit, 
and since the major part of his work is in the form of 
handling deposit currency, he must be able to make the 
substance of his profit from that process. For clearness, 
the profit from the two types of deposits may be considered 
separately. First, deposits which involve the actual placing 
of funds in the keeping of the bank may be considered. 
The bank may pay a small rate of interest to the customer 
for the sake of having the funds in its control, and then 
may lend the funds out to someone else at a higher rate of 
interest. The margin between the two rates of interest 
would be the margin for profit. But the funds may be 
placed with the bank for safe keeping and for convenience 
without any interest being paid to the customer. In the 
latter ease, it is natural to wonder whether the bank can 
lend these funds out in the same way. The practice of 
banking allows the banks to lend not all but a considerable 
proportion of the funds, the practice being made safe and 
feasible because the bank knows that it will not be called 
upon by all of its customers to refund the deposits at any 
one time. Moreover, the bank can and does aim to arrange 
the length of time of its loans and the dates of maturity in 
such a way that a steady stream of loans will be maturing 
at known periods during the year. This arrangement, com- 
bined with the assurance that the customers will not come 
together on the same day and announce that one and all 
want their money out, makes it safe for the bank to lend 
out a large proportion of the amounts placed in its keeping 



380 Money and Credit 

by customers. In transactions with such deposit accounts, 
the bank may or may not be obliged to pay any interest for 
the deposits, but does on the other hand receive the current 
rate of interest for lending out the funds. So whether the 
bank has to pay a low interest rate for the deposits or re- 
ceives them free for safe keeping, it makes its profit by 
means of lending the funds out again at as good an interest 
rate as can be secured. By this means, the bank makes a 
profit while rendering a real service to the customers who 
have placed the money in deposit and to the customers who 
have borrowed from the funds thus deposited. 

However, if this were the only means of profit, the banks 
would not be highly profitable institutions. They have a 
further source of profits in the loan deposits, because the 
amount which can be loaned is well above the cash assets 
which the bank possesses. The bank is a " manufactory of 
credit" in that it creates loans above and beyond the 
amount of its actual money resources, and this manufac- 
tured credit, this loan deposit currency, brings a rate of 
interest to the bank, thereby furnishing income toward the 
profits of the bank. To quote David Friday, "What has 
happened is that the bank has loaned out to people who 
have left those loans with the bank as demand deposits a 
large amount of credit in excess of its capital and surplus 
and deposits made by real savers. . . . The unique power 
which the banking institution has is this ability to manu- 
facture credit, sell the right of its use to individuals, and 
yet be assured that the credit shall remain upon deposit 
with the bank and not be drawn out in such manner as to 
subject the bank to depletion of its cash reserves."^ More- 
over, such deposits as are not needed to meet immediate 
obligations can be invested in securities of railroads, public 
utilities. Government bonds, etc., to draw an investment in- 
come. Principally from these devices, the banks manage to 
make a substantial profit in their enterprise. The national 
banks of the United States, for instance, during the eight 
years ending June 30, 1916, made net earnings of about 9 
per cent, on their combined capital and surplus. 

ij). Friday, "Profits, Wages and Prices," pp. 213-214. 



Money and Credit 381 

Forms of Loans 

The methods by which banks loan credit assume a wide 
variety. One important form is single-name promissory 
notes of individuals or corporations. The borrower is 
granted a loan because the bank has confidence in his ability 
to pay back the amount when it comes due or in his char- 
acter and integrity. No definite property is pledged as 
security, but the business prosperity of the borrower must 
be clearly assured. This business prosperity is ascertained 
by inquiries in the business neighborhood about the state of 
the borrower's business, by consultation of the records of 
commercial agencies, such as Dun's and Bradstreet's, indi- 
cating whether the borrower's credit rating is sound, by 
personal interviews with the would-be borrower, by requir- 
ing the borrower to make a detailed financial statement 
showing resources and liabilities, and by making sure that 
the borrower's quick assets are at least double his current 
liabilities. The last criterion is of special significance, be- 
cause the quick assets include assets which could quickly be 
converted into money for payment of the loan when due. 
Such quick assets include cash on hand or in banks, bills 
and accounts receivable, merchandise and raw materials 
that are salable. These assets should be at least double all 
current liabilities of the borrower up to the date of ma- 
turity of the loan. The bank thereby has adequate assur- 
ance that the borrower will have full ability to pay when 
the time comes. Honesty and ability on the borrower 's part 
are the fundamental considerations which determine 
whether the bank will consider a loan safe. Funds raised 
by the loan are used principally for working capital pur- 
poses, such as the purchase of raw materials or of com- 
modities to be used in production processes or distribution 
processes. 

A second form of loan, also of wide importance, is two- 
name paper. This paper covers indorsed notes and trade 
acceptances. Examples might be found in the retail mer- 
chant who buys goods from a wholesale house, and being 
unable to muster payment for the goods until he has had 



382 Money and Credit 

time to retail them out to his customers, gives a promise to 
pay at the end of a certain period. The wholesaler, how- 
ever, does not want to wait for his money, so he takes the 
promise to pay to his banker, indorses it, and secures from 
the banker immediate payment. The note of the retailer 
contains two names, his own and the wholesaler's, and this 
two-name paper provides two parties responsible for the 
payment of the note when due. The bank holds the note 
until it comes due, thereby granting credit or what 
amounts to the same thing, making a loan which finances 
the trade deal. A trade acceptance differs from an in- 
dorsed note in that the acceptance is an order written by 
the seller to the buyer requiring payment, whereas the 
indorsed note is a promise to pay written by the buyer to 
the seller. When the buyer receives the order to pay, he 
writes ''Accepted" across its face, and returns it to the 
seller. The seller then holds a completed trade acceptance 
which he may present at his bank, and if the acceptance 
meets with the banker's approval, he receives payment at 
once. Hence the seller does not have to wait for his pay- 
ment ; the bank does the waiting, and thereby serves to loan 
the amount to finance the transaction. These forms of 
commercial paper arise from actual commercial transac- 
tions for agricultural, industrial, or business purposes. 
Commercial paper has been estimated as comprising some- 
thing like one-fourth of all bank credit.^ It provides a 
most important service in commercial transactions by mak- 
ing it possible for buyers and sellers to finance their activi- 
ties in forms which supply adequate safety for bank credit 
support. 

Other forms of loans are distinguished by other types of 
security. Some loans are secured by mortgages on real 
estate property, some by promissory notes which the bor- 
rower has in his possession awaiting pajonent by people in 
debt to him, some by collateral in the shape of stocks and 
bonds. If, for any reason, the loan made by the bank on 
feuch security is not paid at maturity, the bank can take the 
real estate, or the collateral notes, stocks, or bonds, and use 

IB. M. Anderson, "The Value of Money," p. 512. 



Money and Credit 383 

the proceeds from them to supply payment of the loan. 
Still other forms of security for loans are bills of lading or 
warehouse receipts. These instruments give title to actual 
goods in process of shipment, or in storage, "and the goods 
themselves are the real security behind the loans. 

Moreover, commercial banks use a considerable part of 
their funds for investment purposes. The facts of the case 
at this point suggest how misleading is a frequent concep- 
tion of commercial banks, namely, that the overwhelming 
bulk of their work is devoted to purely commercial credit. 
"Excluding real estate loans, more than one-half of bank- 
credit represents either ownership of bonds (with some 
stock) or else advances on stocks and bonds. "^ Commercial 
banking is vitally dependent therefore upon investment 
loans, that is, long-time credit devoted to the financing of 
the fixed capital requirements of corporations. Purchase 
of stocks and bonds, or loans to others who use the credit 
toward such purchase of stocks and bonds is in the nature 
of investment credit. Stock exchange speculation relies in 
a very large degree upon funds derived from banks. How- 
ever, stocks are a minor part of direct bank investments, 
the bulk of such investment loans being made in bonds, 
either corporation bonds or government bonds. Investment 
credit prefers bonds over stocks because of the more con- 
servative character of bonds.^ 

A different classification of loans shows time loans and 
demand loans. Time loans run for such periods as thirty, 
sixty, or ninety days, or more. Demand loans may take the 
form of call loans, in which case they are used for stock 
market speculation ; or they may take the form of demand 
credits in which it is understood that the loan will be al- 
lowed to run indefinitely, provided only that it remains 
safe in all respects. The length of time loans, and the dates 
of maturity, are arranged in such a manner that a certain 
amount of loans is maturing all of the time. This insures 
a constant stream of incoming payments for the bank be- 

1 Anderson, Ihid., p. 512. 

2 For explanation of relative security of bonds and stocks, see pp. 
209-211. 



384 Money and Credit 

cause of the creditors who have to pay off their debts. By 
scattering the dates of maturity of time loans fairly evenly 
throughout the year, the bank has money coming in regu- 
larly. As loans mature, the payments on them form the 
basis for new loans. 

Discount 

When a bank collects interest on the loan at the time 
when the loan is made, the interest is deducted from the 
amount of the loan in advance, and this deducted interest 
is known as discount. Discount then differs from interest 
in that interest is collected at the expiration of a loan, 
whereas discount is deduction of the amount of the interest 
at the making of the loan at the outset. The discount 
enables the banker to make some profit on the transaction, 
and pays him for the service of creating the loan credit. 
The borrower is willing to pay the discount because he 
recognizes that the banker is rendering him a real service 
in enabling him to carry on his business. 

The Network of Financial Institutions 

Commercial banks are the most important of the finan- 
cial institutions, but there are other types of financial in- 
stitutions of vital importance, and the various types supple- 
ment each other in a multitude of ways. In their entirety, 
the financial institutions of all sorts constitute an immense 
financial network, interdependent and interrelated, and 
unify the financial services required in modern specialized 
industry operated under the price system. 

Investment banking institutions play a very important 
role in the whole financial system, their advent being a 
practical necessity under the regime of corporate industry. 
Investment bankers serve as middlemen between corpora- 
tions issuing securities and investors seeking to purchase 
securities. Investment bankers have thus far been keenly 
jealous of their reputations for dealing only in securities 
which are safe and reliable. They have shunned specula- 
tive securities, and have confined their services to the better 
type of stocks and bonds. Most corporations invite the aid 
of investment bankers in selling their securities to the invest- 



Money and Credit 385 

ing public, and most investors are glad of the expert advice 
and assistance of the investment bankers in directing them 
in placing their money safely, wisely and profitably. 

One function of investment banking is careful analysis 
of the soundness and reliability of the corporation whose 
securities are seeking the investment market. This analysis 
is possible only at the hands of experts. It includes a very 
elaborate survey and investigation of legal factors, such as 
taxation provisions, degree of regulation of the corporation 
by state or federal governmental commissions, laws affect- 
ing the business, etc. ; of engineering factors, such as pro- 
ductive equipment, efficiency of management, nature of 
material, etc. ; of financial technique, such as fair price to 
be charged for the securities, rates of income, dates of 
maturity, means of registration, etc. ; of general economic 
factors, such as stability of demand for the corporation's 
products or services, advertising policy of the company, 
amount of competition, market conditions, labor policy, 
etc. ; and finally, of the psychological element, such as the 
public taste, confidence in the leading men in the enter- 
prise, mood of the investing public, and general acquaint- 
ance with the line of business. The isolated investor has 
neither the technical skill and intelligence requisite for 
such an investigation and analysis, nor the money or the 
time to carry it out. 

The mass of investors are thus absolutely dependent upon 
the judgment of the investment bankers. They are helpless 
in their remoteness from the true facts of corporation 
finance, and in their incapacity to analyze and understand 
the factors which make an investment safe and sound. The 
average small investor buys stock with blind confidence in 
the opinion of investment bankers whom he has never seen. 
This reacts upon the bankers as an inducement to build up 
a reputation for great sagacity and reliability in passing 
upon stock and bond issues. The bankers cover their 
chances of making an error by stating that the information 
given in connection with a bond issue is not guaranteed but 
comes from what they consider to be reliable sources. If 
the investment bankers are careless or selfish or inadequate 



386 Money and Credit 

there may happen a calamity such as befell the New York, 
New Haven and Hartford Eailroad a few years back. 
Moreover, the chances for depredations by occasional dis- 
honest investment dealers are not properly under control 
under present conditions. The cardinal fact in this invest- 
ment situation is the helplessness of the average individual 
investor, and his dependence upon investment bankers for 
such safety as may exist for his invested funds. Hence, 
the psychological factor of good will is of utmost impor- 
tance to the investment banker. **In this light," as A. S. 
Dewing points out, "good will is perhaps a more valuable 
asset to his business than to that of any other merchant, 
and ordinarily he protects his reputation at all hazards, 
even though it involves him temporarily in heavy losses."^ 
In these services, the investment bankers serve as a kind 
of balance wheel between the optimistic psychology of the 
promoters of corporations and the credulous psychology of 
investors. The promoters of new corporate enterprises are 
usually characterized by the tendency to over-emphasize 
the bright side of their new projects. A splendid trust in 
the future earning power of the new corporation enables 
them to spread a contagious enthusiasm broadcast, and 
their spontaneous optimism often leads them to excessive 
confidence in new adventures. Moreover, the mass of in- 
vestors are all too easily enthused by fine hopes, and the 
promise of big dividends has almost magic effects in per- 
suading many people to sink their money in securities. A 
large part of the investing public is surprisingly gullible, 
and the investment banker saves the investor from the fate 
to which his own credulity would often lead him, by stand- 
ing as a conservative buffer between the promoter of the 
corporation and the prospective buyers of the stock. How 
important this service of the investment banker is appears 
from the fact, as stated by Dewing, that * * it is probably not 
an exaggeration to state that upwards of ten enterprises are 
rejected by every investment banker for every one that 
is accepted. ' '- 

lA. Dewing, "Financial Policy of Corporations," II, p. 28. 
2 lUd., II, p. 30. 



Money and Credit 387 

After the investment banker has decided to act as the 
merchant to sell the securities of a corporation to investors, 
he proceeds to map out a selling plan. He seldom under- 
takes the sole responsibility for marketing the securities. 
On the contrary, he organizes an underwriting syndicate of 
bankers to market the securities by their associated efforts. 
This group of bankers takes the securities from the corpora- 
tion at a certain price in the expectation of selling them 
to the buying public at a higher price. If this expectation 
proves well founded, the sales take place all right, if not, 
the syndicate suffers a loss. The syndicate takes the risk, 
in other words, of marketing the bonds or stocks. The 
existence of this risk is the main reason for forming the 
syndicate. The group action serves to distribute the risk 
among a number of bankers. No one investment firm is 
overloaded with financial responsibility, and the action as 
a group serves to make the whole transaction for the mar- 
keting of the securities surer and safer for all parties con- 
cerned. In the larger and more important transactions, the 
number of underwriters may run as high as more than one 
hundred.^ 

The profits of the investment bankers may be of two 
sorts, commissions on the sales, or bonuses of common stock. 
The commissions on sales arise from the margin between 
the price paid the corporation for the securities and the 
price charged investors. For instance, if the bankers buy 
securities at 96 and sell at 98, the margin of two gives the 
banker's commission. At the same time, the syndicate may 
be given blocks of common stock which represent not pres- 
ent tangible property, but have value because of the pros- 
pect that the earning capacity of the new corporations will 
be great enough to pay dividends on the common stock in 
the near future. The profits in some cases have been enor- 
mous. The promotion and underwriting of the United 
States Steel Corporation with its various subsidiaries re- 
sulted in the award of about one-seventh of the total capital 
stock of the Steel Corporation for promoting and under- 

iBrandeis, "Other People's Money and How the Bankers Use It," 
p. 43. 



388 Money and Credit 

writing services, or a total of more than $150,000,000. But 
there have been frequent losses of large sums among under- 
writers. ''Their profits through successful syndicates are 
often almost, if not entirely canceled by losses from unsuc- 
cessful underwritings."^ The risks involved, of course, war- 
rant substantial profits, although in a number of cases the 
profits have seemed to be exorbitant and unearned. In 
general, the profession of investment banking is looked 
upon as being generously lucrative. 

Investment banking involves, besides analysis and under- 
writing, the actual disposal of the securities to the buying 
public. A large part of t]ie securities are marketed through 
large distributing houses, retail banking houses, bond 
houses, and local retail merchants. Bond salesmanship is 
one of the highest types of salesmanship and necessitates 
an unusual grade of personality, ability and enthusiasm 
among the salesmen. These distributors of one sort and 
another all rely mainly upon personal solicitation to sell the 
stocks or bonds. There is, therefore, a very elaborate ma- 
chinery for the analysis, underwriting and marketing of 
investment securities, a machinery which facilitates the 
merging of the funds of widely scattered investors into the 
hands of corporations to be used for purposes of business 
organization and activity. 

The corporation securities considered thus far have been 
high grade securities, where risk is reduced to a minimum 
for investors, where money is reasonably safe, where income 
is reasonably sure. But there is another class of corporate 
securities quite the opposite in character, and very large 
and very important, where the risks are so high that they 
are properly termed speculative securities. These specula- 
tive, or low grade securities, take the form of stocks, vir- 
tually never of bonds. Most business, at the outset, is faced 
with great hazards. Most corporations have to prove them- 
selves before investment bankers will back their securities. 
At their best, with the most careful management and the 
most cautious planning, new corporations are experiments 

1 Dewing, "Financial Policy of Corporations," II, pp. 125-127, 148- 
151. 



Money and Credit 389 

whose chances of failure are large ; and at their worst, they 
are reckless or fraudulent schemes to exploit a gullible 
public. 

The downright frauds take a toll of hundreds of millions 
of dollars annually from the innocent public. Patent medi- 
cine fakes, fictitious schemes sold through the mails, 
swindles advertised in newspapers, Ponzi adventures, and 
their like are very common and fleece the credulous public 
of immense sums every year. Certain ingenious concerns 
have compiled lists of those people who in the past have 
snapped most easily for the bait of swindlers, and for a fee 
they provide so-called ** sucker lists" to the leaders of new 
schemes of fraudulent exploitation. This record of the 
individuals of the country whose instinctive equipment 
makes them practically unable to say * ' No ! " to new glitter- 
ing promises of immense profit is a real asset in selling the 
new securities. The people on these lists are those who are 
incapable of guiding their future action by past experi- 
ence; their psychology makes them easy marks time and 
again for clever swindlers. 

Many low grade securities are not frauds, but are so 
highly speculative that the chances are strong for an ulti- 
mate collapse of the new company and the consequent loss 
of the money sunk in the scheme. New oil companies and 
new mining adventures are typical of these extremely haz- 
ardous undertakings. 

In an effort to check the marketing of all such low grade 
securities, most states have passed laws, commonly called 
**blue sky laws." The laws have not proved effective to a 
satisfactory degree and there is still urgent need of pro- 
tecting the innocent public from blind credulity, and re- 
straining the fraudulent or reckless promoters from gross 
exploitation. 

Two extremes of financial securities have thus far been 
presented, first, the thoroughly high grade ; second, the dis- 
tinctly low grade. There is a vast body of intermediate 
stocks, neither ultra-speculative nor completely conserva- 
tive, which also have to find a market. This body of securi- 
ties is represented in the bulk of preferred stocks offered 



390 Money and Credit 

for sale and the more cautious common stocks. Some of 
these securities are sold direct by corporations to their la- 
borers. For example, the United States Steel Corporation 
reports approximately 50,000 shares of stock sold to the 
workers in the steel plants. Some are sold direct to general 
investors. A very large proportion is sold through the 
stock exchanges. 

The stock exchange is a market-place for corporation 
securities, including bonds, preferred stocks and common 
stocks. A large number of the bond issues which are sold 
through bond houses are also listed on the exchanges, but 
the actual sales through the exchanges are probably not 
more than one-tenth of the sales through investment 
bankers. The New York Stock Exchange is a voluntary 
association of not to exceed 1,000 members. Membership 
has to be purchased, and in recent years the price given for 
membership has run as high as upwards of $100,000. The 
Exchange maintains a "Committee on Stock Lists," whose 
duty it is to require evidence from the corporation apply- 
ing to have its stocks or bonds traded in on the floor of the 
Exchange, to prove the financial, legal, commercial, and 
technical status of the concern. The Committee is a safe- 
guard against fraudulent securities and over-speculative 
securities. The Committee is not so exhaustive or so careful 
in its analysis of the applying corporation as the investment 
bankers are in selecting the security issues which they will 
deal in, but the Committee does carry the analysis far 
enough to eliminate the more dangerous corporate securi- 
ties from the privileges of the Exchange. There is also the 
Consolidated Exchange, which at first dealt almost entirely 
in mining securities, but which has broadened its activities, 
and now deals in a great many issues which are at the same 
time listed on the New York Stock Exchange. Finally 
there is the New York Curb Exchange, until recently held in 
the open street, which deals in a great many security issues 
which are too speculative to win admission to the Stock 
Exchange. It also provides a sale for the securities of many 
small corporations. The exchanges provide a market-place 
for the securities of different grades, and facilitate the buy- 



Money and Credit 391 

ing" and selling of investors and speculators on a grand 
scale. 

The memberships of the Stock Exchange make possible 
the functions of brokers, that is, of buying and selling not 
for the member's own account only, but for the account of 
anybody who has money to place. Brokers to deal through 
the various types of exchanges have built up a system 
of large scale operations. The brokers serve as agents 
for customers, and work for a commission. Their duties 
are to buy when the customer says buy and sell when he 
says sell, meantime supplying him with much expert in- 
formation and advice on the value and probable income of 
the securities in the future. The larger brokerage houses 
maintain branches in the large cities of the country and 
are in constant communication with the branches by an 
elaborate telegraph system. 

In the year 1918, the volume of transactions on the New 
York Stock Exchange alone was 144,118,469 shares. That 
number of shares changed hands between buyers and 
sellers. The total par value of all securities listed on the 
New York Stock Exchange in 1918 was approximately 
$40,000,000,000.1 ^^On the floor of the New York Stock 
Exchange we have dealings in excess of 25 billions for 
1909. This is nearly as large as the figure we have as- 
signed. ... to total retail trade of the country, and it may 
well exceed the retail trade in fact."^ 

A large proportion of these stock and bond transactions 
is conducted by means of borrowed money and checks, in 
other words, by means of bank credit. The common form 
of bank credit to finance speculative deals is call loans, 
that is, loans which the banks can require to be repaid at a 
day's notice. The call loan is used by the broker to provide 
nine-tenths of the purchase price of the stock, the other 
tenth being provided in cash by the customer. This form 
of buying and selling is known as trading on margins. 
Bank credit is extended, moreover, in vast amounts, to cor- 
porations to provide them with capital needs, and is se- 

1 Jordan, "Investments," pp. 258-259. 

2 B. M. Anderson, "Value of Money," p. 250. 



392 Money and Credit 

cured by stock and bond collateral. Also, banks directly 
invest in the neighborhood of 20 to 30 per cent, of their 
funds in stocks and bonds, and these investments constitute 
for the most part long-time loans. Bank loans for invest- 
ment or speculative purposes thus comprise an astonish- 
ingly large proportion of the credit extensions of commer- 
cial banks. The conclusion has been drawn by Moulton 
that, *'It is enough that we may safely conclude that 
around 50 per cent, of all loans of national and state banks 
and trust companies is devoted to investment uses, and 
that, including direct investments, in the neighborhood of 
two-thirds of all the credit extended by commercial banks 
goes for fixed rather than for working capital."^ 

In one way and another, the market facilities for stocks 
and bonds supplied by the exchanges are of the greatest 
importance in the organization of the price system, and are 
indispensable for a system of economic enterprise in which 
corporation securities play a primary part. The exchanges 
make possible a place where the holder of securities can 
virtually always find an immediate sale for his holdings. 
The would-be buyer can find offerings of securities to suit 
every whim or taste, from the ultra-risky to the ultra-safe. 
People having funds for short periods available for use can 
place them in remunerative securities for the limited 
period. The constant bidding and asking of prices be- 
tween buyers and sellers places a constant valuation upon 
the securities of any corporation, a valuation which takes 
fully into account the prospective earning capacity of the 
corporation. In brief, the services of stock exchanges may 
be summed up as follows : First, they make it possible for 
anybody to convert his savings into shares of property 
which yield income ; second, they insure that shares of cor- 
porate property shall always be marketable, that whenever 
the holder wants to sell, he may find a buyer; third, they 
provide a means whereby those who are willing to take the 
speculative risks of industry may compare their forecasts 
of industrial and commercial values, and of the future 

''■Journal of Political Economy, Vol. 26, p. 658. See also B. M. 
Anderson, "Value of Money," Chapters 13 and 19. 



Money and Credit 393 

earning power of corporations, and by their competitive 
and composite judgment adjust property prices to property 
earning power ; they make possible bank credit based upon 
material which can be quickly converted into money, that 
is, based upon collateral security in the form of stocks and 
bonds. 

Savings Banks 

Another form of financial institution is found in savings 
banks. These banks exist for the purpose of collecting sav- 
ings in small amounts. People who can lay aside only a 
few dollars at a time find in savings banks a place for the 
safe keeping of their money and at the same time are able 
to draw a small rate of interest. The banks make profits 
by lending out the bulk of the deposits thus made, at 
higher rates of interest. The loans must be very con- 
servative, and the type of loans which can be made is 
restricted by law to the safest and best. In 1920, the 
savings banks of the United States had over 11,000,000 
depositors with a total of deposits of more than $6,500,- 
000,000. This vast fund of savings, averaging for each 
individual depositor less than $700, is aggregated by the 
savings banks, and the lump sums derived from the assem- 
bled mass of petty accounts are used to finance the fixed 
and working capital requirements of industry to a huge 
total amount. The function of the savings banks for the 
depositors consists of holding their savings in safe keeping 
at a small interest rate; their function for industry and 
commerce at large consists in bringing together a scattered 
mass of individual small sums into a total fund of capital 
available for investment and commercial credit. The sav- 
ings banks pool the savings of millions of small investors 
and thus make their savings available for large scale credit 
operations such as are necessary in the conduct of modern 
corporations. 

An essentially similar function is performed by insur- 
ance houses, although they are not commonly thought of 
primarily as savings bank institutions. However, the pre- 
miums paid into the insurance companies build up largo 



S94 Money and Credit 

funds which must, not be allowed to lie idle. The insurance 
companies use the funds derived from premium payments 
for investments and loans. The total amount of life insur- 
ance assets utilized in this way in 1917 was nearly $6,000,- 
000,000. The money paid in by millions of scattered policy 
holders is thus collected into lump sums, and converted into 
real estate holdings, mortgages, bonds, high grade stocks, 
policy loans, and short-time loans to business concerns. 
Insurance concerns are usually under careful government 
supervision and are required to be highly cautious in plac- 
ing loans and investments. Their responsibility to their 
policy holders is of the utmost importance, and their ser- 
vices to industry and commerce generally in the form of 
credit creations facilitate greatly the activities of eco- 
nomic life. 

Trust Companies 

The complicated interrelations of modern finance led 
during the last generation to the organization of trust com- 
panies. Their functions are various. One function is to 
act as trustee of the mortgages or collateral pledged as 
security when bonds are issued. This trusteeship requires 
an oversight of the value of the properties pledged as bond 
security, and a responsibility for observing that the terms 
of the bond are lived up to by the corporations concerned. 
This function therefore serves to protect the rights and 
interests of investors who could not personally take charge 
of such matters. A second function is that of transfer 
agent. When one form of stock is substituted in a cor- 
poration for another form, when one form is replaced by 
new forms of securities, the trust company acts as agent to 
call in the old certificates and pass out the new ones. It is 
also transfer agent in recording the transfer of stocks and 
bonds from one owner to another. The trust company 
stands between the corporation and the owners of its se- 
curities, with the responsibility for an independent and 
reliable record of all such transfers of securities. A third 
function is registration of securities to prevent overissue. 
The trust company, by registering the total of all stock 



Money and Credit 395 

actually issued, can make sure that this total does not 
exceed the amount authorized. As registrar, the chief ser- 
vice of the trust company is to prevent the corporation 
from issuing securities above the maximum authorized. 
Fourth, in case of default of interest on bonds, or of insol- 
vency, or reorganization or amalgamation of properties, it 
becomes important to have a reliable agent who can hold 
stocks and bonds and other property claims in trust pend- 
ing the readjustment of property. The trust company is 
the logical agent for this service. Finally, trust companies 
act as fiscal agents for private corporations and for educa- 
tional and social institutions of many sorts. The fiscal 
duties may be the supervision of interest and dividend pay- 
ments, the custody of securities, a careful scrutiny of the 
property and business of corporations whose securities are 
in custody for the purpose of making sure that efficiency 
and stability are maintained, and a general charge of the 
care and protection of property interests for their clients. 
These services are all indispensable under a corporate 
property regime, and the trust companies therefore are 
an indispensable institution in the corporate financial 
system. 

There are other highly important services of trust com- 
panies in addition to their services to corporate industry. 
The handling of estates has come to involve so many tech- 
nical and legal problems that it requires the constant guid- 
ance of experienced and skillful experts. Trust companies 
act as administrators, executors, guardians, trustees, 
assignees, custodians of properties, etc. They offer services 
for the making of wills, and for executing them in due 
time. Holders of property who do not wish to be bothered 
with managing it, or who do not feel themselves competent 
to manage it, can voluntarily turn the property over to the 
care and control of a trust company, thus receiving all of 
the benefits of property ownership with few of the worries 
and responsibilities of managing it. The expert guidance 
and control supplied by trust companies is of imperative 
importance for the safe and wise use of vast amounts of 
property. Trust companies may also engage in the prac- 



396 Money and Credit 

tices of commercial and investment credit.^ In a wide va- 
riety of ways, they supply essential functions in the opera- 
tion of the highly technical economic system of modern times. 

Foreign Investment Banking 

The exchanges provide facilities which are taken advan- 
tage of in the buying of domestic securities, but offerings of 
foreign securities require other marketing facilities. Before 
the World War, European nations were well advanced in 
facilities for the safe investment of their funds in the 
securities of countries all over the world. The foreign in- 
vestments of Great Britain alone amounted to nearly $20,- 
000,000,000 before the war. European nations before the 
war held upwards of $6,000,000,000 worth of the securities 
of American corporations. The savings of Europeans each 
year gravitated toward the corporation stocks and bonds of 
foreign countries, with the result that the industry and 
commerce of non-European countries were in a very con- 
siderable degree owned by Europeans. The development 
and economic progress of outside countries depended upon 
capital funds from the more highly developed industrial 
countries of Europe. Each country had financial institu- 
tions which connected investors at home with securities 
abroad in ways which were reasonably safe and profitable. 
For example, the investors of Great Britain had access to 
British investment trusts which served as a medium and 
agent between home investors and foreign corporations. 
These trusts were able to make some analysis of the cor- 
porations seeking a market for their securities in Great 
Britain, and were able to diversify investments in such 
ways as to minimize the risks of foreign investments within 
safe limits. 

1 In fact, most trust companies now have a large part of their 
operations in the form of straight commercial banking and of invest- 
ment banking. Trust companies may become members of the Federal 
Reserve System; and commercial banks which are members of the 
system, may by special permission of the Federal Reserve Board, 
engage in the special trustee activities of trust companies. Trust 
companies also, in many instances, combine with their commercial 
banking activities, the activities of saving banks. Some trust com- 
panies are such in name only and do almost wholly commercial and 
savings banking. 



Money and Credit 397 

Before the war, the United States bought only a negli- 
gible amount of foreign securities. Her home savings were 
not enough to buy all of the securities of her home corpora- 
tions. American corporations often relied upon European 
investment bankers and trusts to float their securities in 
European market circles. As stated, American securities 
owned abroad were nearly $6,000,000,000. The war changed 
the relationship so that now these securities have largely 
returned to the hands of American investors, and, what is 
more impressive, Americans hold upwards of $4,000,000,000 
of European securities. In addition to these security hold- 
ings, the United States Government has loaned to the Euro- 
pean countries about $10,000,000,000, and a floating in- 
debtedness to Americans for unsettled export accounts has 
run up to over $3,000,000,000. This situation involves an 
annual interest owing the United States of about $600,- 
000,000. These relations make of the United States a 
creditor nation.^ The fuller implications of this creditor 
status will be gone into later, but at this point it is im- 
portant to understand that the net effect upon the financial 
institutions of the United States is to encourage a continued 
and increasing investment of American funds in the indus- 
trial securities of those European countries which are 
debtors to the United States. 

Investment trusts therefore become a necessity in this 
country. Under the Edge law, passed by Congress since 
the war, banking institutions are authorized to associate 
themselves for the purpose of making available to Ameri- 
can investors securities which will provide funds for com- 
merce and industry for foreign countries. Several such 
associations among large bankers have already been formed, 
and although the future of their activities is uncertain, it 
appears hopeful that the new investment trusts for for- 
eign corporation securities will have indispensable func- 

iSee Annual Report of United States Treasury, 1920, pp. 73-92; 
Federal Reserve Bulletin, Nov., 1921 ; Moulton and Bass, "America 
and the Balance Sheet of Europe," pp. 19-27; Friedman, "Inter- 
national Finance and Its Reorganization"; "Annals of the American 
Academy," March, 1921; B. M. Anderson, Jr., Chase National Bank 
Economic Bulletin, Oct. 5, 1920. 



398 Money and Credit 

tions in the placing of American savings and in the financ- 
ing of foreign industry and trade.^ 

Other Financial Organizations 

Several other credit and money organizations enter into 
the processes of the financial system. Commercial paper 
houses operate by selling notes and bills of exchange of 
business men to bankers. They serve as brokers, and busi- 
ness men find it advantageous to patronize them because 
of rates more favorable than banker's rates, or because a 
business firm wants more credit than its bank desires to 
handle, or because a firm desires to treat its borrowing 
power with its bank as a reserve for emergency needs. 
Discount companies operate by purchasing accounts receiv- 
able from business men, thereby supplying business men 
who have sold goods on credit with immediate money for 
their business needs. The discount company waits for the 
accounts to mature, and thereby serves both the buyer and 
the seller of the goods. Such companies, in turn, borrow 
heavily from the commercial banks to obtain the funds 
which they supply to business men, by discounting their 
accounts receivable. A large part of the accounts receiv- 
able discounted in this way are automobile accounts. The 
automobiles of the country are bought, in the majority of 
cases, on credit. The automobile corporations are not them- 
selves able to wait for the accounts to be paid, and hence 
secure immediate money by discounting the promises to pay 
of the buyers of cars with discount houses or automobile 
banks. 

Agricultural credit has in the past been subject fre- 
quently to very high rates of interest. The credit has been 
secured largely from country commercial banks, cattle loan 
companies, private individuals, store keepers in the com- 
munity, the manufacturers of farm machinery, and farm 
mortgage companies. Since 1916, agricultural credit has 
been facilitated by a Federal Farm Loan System, which 

iMoulton, "Financial Organization of Society"; J. M. Keynes, 
"Economic Consequences of the Peace"; F. A. Vanderlip, "What 
Happened to Europe"; P. M. Warburg, Political Science Quarterly, 
December, 1920. See also pp. 423-426 of this volume. 



Money and Credit 399 

provides for Federal encouragement and supervision of 
Federal Land Banks, Farm Loan Associations, and Joint 
Stock Land Banks. 

The basic principle of this system of farm credits is that 
farmers may borrow money by giving, as a security, mort- 
gages on land values, and that the farm banking institu- 
tions may use this mortgage security as the basis of bond 
issues to be sold to general investors. The sale of such bond 
issues supplies the banks with funds which can be used in 
the financing of further farm loans based in turn on their 
proper security of land mortgages. Thus the farm banks 
obtain a large part of their loanable resources by issuing 
bonds based upon farm mortgages in their possession. 
Other resources are obtained by the sale of capital stock to 
private investors and to the United States Government. 
Farmers secure their credit by mortgaging their land to the 
banks as security for the loans. The machinery of this 
farm credit system consists, first of all, of a supervisory 
body, known as the Federal Farm Loan Board. This board 
divides the country into twelve districts, and establishes a 
Federal Land Bank in each district. Each of these twelve 
district land banks may in turn establish branches in its 
own district. The amount of loans of these land banks in 
1920 was about $350,000,000. Loans of these Federal Land 
Banks are made through Farm Loan Associations, com- 
posed of farm owners, who own shares of the capital stock 
of the land bank. Rates of interest are not to exceed six 
per cent, and loans may run from five to forty years. In 
1920 there were approximately four thousand Farm Loan. 
Associations in operation, principally in western and south- 
western states. There are also established, under supervi- 
sion of the Federal Farm Loan Board, what are known as 
Joint Stock Land Banks, which are private corporations, 
and which cannot have any of their stock owned by the 
United States Government. These banks are subject to the 
maximum interest rate of six per cent, and they may, sub- 
ject to certain limitations, loan any amount they wish and 
for any purpose. In 1920, there were twenty-five active 
banks of this type, with mortgaged loans amounting to 



400 Money and Credit 

approximately $79,000,000. By this machinery, long-term 
rural credits are facilitated, but short-term credits are not 
materially aided. Moreover, the loans of the land banks 
are aimed to aid persons who are already owners of some 
amount of land more than to aid tenants of farms. The 
system needs a much wider extension than at present, but 
it is a move in the direction of supplying farmers with 
credit at reasonable rates of interest when and where needed. 

In addition to all of the previously mentioned credit in- 
stitutions, there are numerous pawnbrokers who furnish 
credit, usually in small amounts; there are so-called loan 
sharks who make loans to people who are in pressing need 
of small sums, at rates of interest running as high as 200 
and 300 per cent. ; there are co-operative banks established 
by credit members and others established by labor unions, 
the latter being illustrated by the recent banks organized 
by the Railroad Brotherhoods; there are Morris Plan 
Banks, which extend credit for consumers' needs; and there 
are building and loan associations with a membership of 
more than 4,000,000 and total assets of about $2,000,000- 
000 which serve to finance home buying and to car© for the 
savings of members and investors. 

This array of financial institutions, ranging all the way 
from commercial banks to building and loan associations, 
constitutes a vast mass of credit and money organizations, a 
varied and scattered horde of different types of concerns, 
each serving special needs and performing in its own par- 
ticular way useful and indispensable functions. But in 
their entirety they are bound together in one harmonious, 
unified, interrelated price system. The two striking aspects 
of the whole financial system are first the immense variety 
and the wide range of different types, and, second, the 
unity of financial organization which is attained out of the 
multiplicity of forms and types. The means whereby unity 
is achieved deserve description at some length. 

The Interdependence of Financial Institutions 

The multitudinous types of financial organizations are all 
cogs in a single financial wheel. They are interrelated and 
interdependent, and function as a financial clockwork. 



Money and Credit 401 

It has already been stated that the commercial banks 
hold the position of dominating importance in the financial 
structure, and it is therefore proper to consider the ma- 
chinery by which the commercial banks within each local 
community and between communities are enabled to func- 
tion in co-operation and harmony with each other. In any 
city of considerable size, the main banks are organized in 
clearing houses. The principle of the clearing house is in 
essence that the member banks shall settle the balances of 
debit and credit among themselves by a process of cancella- 
tion. In a single city, the banks are not acting each inde- 
pendently of all the others, but are constantly doing 
business with each other. If there are twenty important 
commercial banks in a given city, the depositors of each 
bank are drawing checks on their accounts and sending the 
cheeks to depositors in the other banks as a means of paying 
bills to business men who keep their deposits with those 
other banks. Suppose a business man who does his banking 
with bank No. 1 is engaged in business deals which involve 
the payment of bills to and the receiving of money from 
fifty other men. Suppose the fifty other men have banking 
done, not by bank No. 1, but by the other nineteen banks in 
the city. Checks are passing back and forth through the 
various banks, to and from the various business men, with 
the result that the deposits of each business man vary from 
day to day. The check amounts to an order to the business 
man's banker to transfer a certain amount of funds to 
another man's banker to be put to the deposit account of 
the second business man in that bank. Hundreds of checks 
call for hundreds of transfers of funds from bank to bank, 
involving millions of dollars. The clearing house is a simple 
and convenient means of effecting such transfers by means 
of cancelling the accounts of the various banks in the clear- 
ing association. Each bank sends to the central clearing 
house its checks on other banks, representing the amount 
owed to it by other banks. The other banks bring to 
the clearing house the checks on the bank first mentioned, 
representing the amount owed hy it to other banks. The 



402 Money and Credit 

totals are set over against each other, and balances are 
ascertained. The balances only are paid. 

The methods of paying such balances vary greatly, in- 
cluding direct transfer of cash, clear-house certificates 
based upon cash deposits by each member bank with the 
clearing house, drafts by small banks upon banks in large 
centers, and adjusting banks' balances with the regional 
Federal Reserve Banks. Since the entry of the Federal 
Reserve System of banking, balances can be settled by each 
bank's depositing funds with the Federal Reserve Bank of 
the district and thereafter ordering the bookkeepers of the 
Federal Reserve Bank to transfer on their books the bal- 
ances involved in the inter-bank clearings. A system of 
book accounting then increases or diminishes the deposits 
of each bank and thereby, without the handling of actual 
money, even the balances are adjusted by merely making 
the proper entries on the books of the Federal Reserve 
Bank. 

A considerable percentage of the banks in a city are not 
members of the clearing-house association, due to the cost 
or to the fact that they are not wanted. These non- 
member banks clear their accounts by using one of the 
member banks as agent. In smaller communities, local 
clearings between banks are made by each bank 's sending a 
messenger to the other banks to present the check accounts, 
and thereby to secure a cancellation of a part of the count 
and a payment of the balance. The bulk of clearings, how- 
ever, are made through the big banks organized in clearing 
houses. The largest clearings are in New York, where the 
average daily clearance runs above $300,000,000. 

The consideration thus far has been devoted to interbank 
clearings within a town or city. It is equally important to 
effect clearings between banks scattered all over the coun- 
try. The Federal Reserve System supplies a means for 
carrying out these clearings between the banks of different 
communities. Twelve Federal Reserve Districts are marked 
out, with a Federal Reserve Bank in each district. Each 
of these reserve banks acts as a clearing agent for the banks 
within its district. For example, if a bank in Buffalo re- 



Money and Credit 403 

ceives from one of its customers a deposit of checks, some 
of them made out on a bank in Albany, some on a bank in 
Rochester, and some on a bank in Poughkeepsie, the Buffalo 
bank may send the checks direct to the Federal Reserve 
Bank of that district, located in New York City. The Fed- 
eral Reserve Bank in turn makes the collections from the 
banks in Albany, Rochester and Poughkeepsie. At the 
same time, the three latter banks may have sent checks 
drawn on the Buffalo bank to be collected through the Fed- 
eral Reserve Bank. The reserve bank, by a process of 
book accounting, may offset the debits and credits of the 
various banks, and the balances may be adjusted by book 
entries transferring deposits which the member banks carry 
with the reserve bank. This system practically does away 
with the shipment of specie from bank to bank, and effects 
clearance between banks by the use of checks and book 
accounting. 

The clearings between banks in the twelve separate re- 
serve districts are effected in a similar way. A bank in one 
district desiring to collect a check drawn on a bank in an- 
other district sends it to the reserve bank in its own district, 
which forwards the check to the reserve bank in the other 
district, which in turn collects from the specified bank 
within its jurisdiction. Each of the twelve Federal Re- 
serve Banks ascertains daily the total of all its credit de- 
mands upon the other reserve banks and wires the amount 
to the Federal Reserve Board at Washington, D. C. This 
central organization at Washington holds a ' * gold clearance 
fund," consisting of actual deposits of gold or gold certifi- 
cates from the twelve reserve banks. The central board 
therefore lines up the claims of each of the twelve reserve 
banks against the others, and after arriving at the balances 
due to or from each bank, pays the balance by making an 
entry on its books increasing or diminishing the gold de- 
posits of each bank. This gold clearance fund is not ac- 
tually handled in each case ; there is simply a record made 
on the books of the central board signifying that a part of 
the gold deposits of one reserve bank is transferred to the 
account of another. This system of clearance involves a 



404 Money and Cr'edit 

minimum of money shipments, and accomplishes the ser- 
vices of clearance by the use of checks and book accounting.^ 
The principle of clearance of interbank accounts has the 
most far-reaching and inclusive applications throughout the 
banking system. It unifies the financial services of the 30,- 
000 commercial banks of the country, and facilitates the 
use of credit in the bulk of trade and industrial transac- 
tions. It provides the machinery for an adequate enforce- 
ment of the solid interdependence of financial institutions 
and simplifies the almost infinite interrelations of tens of 
thousands of banks in a most economical and reliable way. 

The Federal Reserve System 

Banking in the United States is supervised by what is 
known as the Federal Reserve System. The unification and 
the effectiveness in almost every way, of the banks of the 
country, are directly related to the Federal Reserve System. 

The Federal Reserve System was established by an Act 
of Congress in 1913, and has been subject to a number of 
subsequent modifications and improvements. The system 
provides for twelve banking districts in the United States, 
the boundaries of the various districts being set by com- 
mercial and industrial reasons rather than by geographical 
ones. Each district has a city containing a Federal Reserve 
Bank. The twelve reserve cities, the financial centers of 
their respective districts, are as follows : Boston, New York, 
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. 
Louis, Minneapolis, Kansas City, Dallas, San Francisco. 

An impressive feature of the organization of the twelve 
Federal Reserve Banks is the extent to which they are 
owned and directed, not by government officials, but by the 
member banks of the districts. Each member bank is re- 
quired to purchase a minimum amount of the capital stock 
of the reserve bank of the district. Hence, the capital stock 
of the Federal Reserve Banks is owned by the member 
banks of the respective districts. The board of directors of 
each Federal Reserve Bank consists of nine members, six of 

1 See E. W. Kemmerer, "The A B C of the Federal Reserve Sys- 
tem," Chapter VIII. 



Money and Credit 405 

whom are chosen by the member banks, and three of whom 
are chosen by the Federal Reserve Board at Washington. 
Hence the dominant power in the board of directors of each 
reserve bank is not with the three appointees of the Gov- 
ernment, but with the six representatives selected by the 
member banks. The central board, known as the Federal 
Eeserve Board, consists of seven members, including the 
Secretary of the Treasury and the Comptroller of the Cur- 
rency as ex-officio members, and five men selected by the 
President of the United States. There is also a Federal 
Advisory Council, consisting of one representative from 
each of the twelve reserve banks, to keep in advisory touch 
with the Federal Reserve Board. These items constitute 
the main framework of the Federal Reserve System. 
Hence, the organization provides for a substantial amount 
of unification of control, but this is not carried to the ex- 
treme of government paternalism. The co-operative unity 
of the twelve reserve banks enlists the concerted interest of 
the constituent parts of the system as much as possible. 

The principles and policies of the system cannot here be 
presented in all their elaborate detail, but the basic features 
can be given in a condensed form which ought to make a 
clear picture of the primary functions and purposes. This 
condensed description will be given under the following 
heads: centralization, note issue, deposit currency, re- 
serves, clearings, panics. 

Centralization 

Prior to the Federal Reserve System, the banks of the 
United States, about 30,000 in number, were for the most 
part, independent concerns, each working for itself and by 
itself, with little co-operation or teamwork. The thousands 
of banks were extremely decentralized, their reserves were 
scattered widely, their interrelations were limited, and each 
bank was largely dependent upon its own resources, and 
those alone, in time of need or of panic. The Federal Re- 
serve System set up a machinery which tended to increase 
co-operation between banks, to bring about co-operation 
in the use of their resources, to enable strong banks to tide 



406 Money and Credit 

deserving weak banks over crises, and to centralize gener- 
ally the functions and powers of the banking world. 

Note Issue 

It had long been a practice for national banks to issue 
notes secured by Government bonds, for the purpose of 
providing a circulating medium to perform the work of 
money instruments in the business world. Bank notes, in 
popular knowledge, are simply five dollar bills, and bills 
of higher denominations, which pass from hand to hand 
in everyday buying and selling. In times of business 
prosperity and expansion more of these bank notes are 
needed. More money is needed to produce and market more 
goods. Prior to the Federal Reserve System, before the 
bank could issue additional bank notes to meet the new 
trade needs, it had to purchase an equal par value of United 
States Bonds as security for the notes. If the price of 
bonds on the market was high, it might not be profitable 
for the bank to purchase them as a basis for the note issue. 
It so happened that often when trade needs called for new 
note issues the prices of Government bonds were high, and 
the result was that just when the trade needs were most 
urgent the banks might be most heavily discouraged from 
buying bonds as a basis for new note issues. Therefore the 
note issues did not expand and contract with trade needs, 
and the resulting inelasticity of hand-to-hand money was a 
most distressing embarrassment for the commercial and 
industrial life of the country. 

The Federal Reserve System did not abolish the old na- 
tional bank notes which remained in existence in 1913, nor 
did it forbid further issues of them, but it provided means 
making possible their gradual elimination from the mone- 
tary supply if the banks desire such an elimination, A new 
bank note currency of two sorts was created, — Federal Re- 
serve Bank Notes and Federal Reserve Notes, The former 
were in most essential respects similar to the old national 
bank notes, being secured by purchases of Government 
bonds or short-time obligations of the United States Gov- 
ernment. Provision is made whereby the new bank notes 



Money and Credit 407 

can be gradually substituted for the old national bank notes. 
Early in 1920, the old national bank notes still outstanding 
amounted to about $725,000,000. In the seven years of the 
Federal Reserve's operation, only about $32,000,000 of the 
old bank notes had been retired, — a condition which would 
indicate that the old bank notes are likely to remain in 
circulation for some time to come. The total volume of the 
new Federal Reserve Bank notes on January 18, 1922, waa 
$84,878,000. Hence the combined total of old and new bank 
notes outstanding was approximately $800,000,000. 

If the Federal Reserve System had provided no other 
form of note issue than this, it would not have solved the 
problem of elasticity of circulating currency to fit the trade 
needs of the country. The system did provide a further 
form, known as Federal Reserve notes, and these notes are 
directly calculated to supply the needed element of elas- 
ticity in the currency system. The Federal Reserve notes 
are issued against commercial credit instruments primarily, 
but are possible also against gold and gold certificates. 
Commercial credit instruments are the fundamental reli- 
ance for assets to back up the notes. Such commercial 
credit instruments include promissory notes or bills of 
exchange or bankers' acceptances which represent strictly 
commercial, industrial, or agricultural transactions, but 
exclude credit instruments to be used for speculative pur- 
poses. Assets for these notes also include credit instruments 
created for the purpose of trading in the securities of the 
United States Government, a provision widely utilized 
in floating the war loans. 

The method of putting out these notes is, in its main 
essentials, as follows : Any member bank which finds that 
some of its customers desire actual paper money when they 
borrow from the bank instead of a deposit loan upon which 
to draw checks, will send some promissory notes, or bills of 
exchange, or banker's acceptances to the Federal Reserve 
Bank of its district. This reserve bank will rediscount the 
credit instruments thus received, — ^that is, will pay the 
member bank the amount of the credit paper less a rate of 
interest deducted in advance. The form of payment will 



408 Money and Credit 

be Federal Reserve notes. These notes are simply the 
paper bills which everybody freely uses in everyday pur- 
chases, and the member bank can pass them out at the 
cashier's window in making change, or in cashing checks. 
It can lend them out to borrowers from the bank, drawing 
on them the prevailing rate of interest. A loan of this sort 
differs from a deposit loan in that the borrower takes away 
with him a roll of paper bills instead of a mere entry on 
the bank 's books entitling him to write checks to the amount 
of the loan. The bank makes a profit because it secures 
interest on the paper bill money supply. The circulating 
currency of the community is increased, and hence the 
expanded trade needs of the community 'are taken care of. 
The commercial paper which the Federal Reserve Bank 
discounted has to be deposited with a Federal Reserve 
agent who has in his keeping a supply of paper notes ready 
to turn over to the reserve bank when the proper commer- 
cial paper is presented to him. This Federal Reserve agent 
represents the United States Government, since he is one 
of the men on the board of directors of the reserve bank 
who is appointed by the Federal Reserve Board in Wash- 
ington. He is directly a Government agent. A further 
requirement must meantime have been met by the Federal 
Reserve Bank, namely, it must keep a gold reserve of not 
less than 40 per cent, as a security behind the notes. The 
total outstanding notes on December 23, 1920, were $3,404,- 
931,000 and on January 25, 1922, $2,184,001,000. The pro- 
cess of this note issue from beginning to end can be sum- 
marized as follows : First, an actual commercial, industrial, 
or agricultural transaction, or purchase of Government se- 
curities; second, a credit instrument, such as a promissory 
note, bill of exchange, or banker's acceptance; third, the 
credit instrument from the local bank rediscounted through 
the Federal Reserve Bank of its district ; fourth, the credit 
instrument deposited with a Federal Reserve agent as the 
basis of note issues and simultaneously a pledge by the 
Federal Reserve Bank of a gold reserve equal to 40 per 
cent, of the note issue ; fifth, the notes turned over by the 
agent to the reserve bank and by it passed on to the member 



Money and Credit 409 

bank where the credit instrument originated; finally, the 
notes passed out by the local member bank to its customers 
in the loans and other financial relations of that bank, so 
that the notes finally become actual circulating medium. 
The whole process provides an elastic note issue because 
the starting point of the increased note supply is increased 
commercial, agricultural, and industrial activity with its 
accompanying commercial paper, and the finishing point is 
more paper money in circulation to take care of more busi- 
ness activity. 

In actual banking practise, it is very common to deviate 
from the course which has just been outlined. Banks get 
the notes first and borrow afterward. The notes are charged 
against their accounts and sent to them at their request, 
and it is only when their reserve balance is going to average 
below the required amount during the period, that they 
borrow to replenish the account, which may have been 
drawn down by payment of checks against the bank, or 
through the clearing house, or by demands for currency. 

When business activity decreases, the note issue tends to 
be retired in proportionate amounts. The member bank 
receives the paper notes back from its customers in the 
daily round of duties. The paper money is used to pay 
wages, to meet bills at the grocery store and the dry goods 
store, to pay for farm machinery, to settle personal ac- 
counts and in a wide variety of daily business dealings. 
The various parties concerned put their money on hand on 
deposit with their bank, in other words, the paper notes 
float back to the bank which holds their accounts. The 
local bank can use the paper notes then in meeting its pay- 
ments to the Federal Reserve Bank, and the Federal Re- 
serve Bank can retire the notes as they come in. It is to 
the interest of the local bank to return the notes to its 
Federal Reserve Bank because the local bank is forbidden 
to count such notes as legal reserve. If the paper notes 
go to other banks than the one which first passed them 
out, the other banks find it to their interest for the same 
reason to use them in payment of their obligations to their 
Federal Reserve Bank. This contraction of note issues is 



410 Money and Credit 

described in a report on Federal Reserve Notes and Cur- 
rency Expansion made by the Governor of the Federal 
Reserve Board in 1919. The report states that the Federal 
Reserve notes "are issued only as a need for them de- 
velops, and as they become redundant in any locality they 
are returned to the Treasury at Washington, or to a Fed- 
eral Reserve Bank for redemption. Thus there cannot 
at any time be more Federal Reserve notes in circulation 
than the needs of the country at the present level of prices 
require, and as the need abates the volume of notes out- 
standing will be correspondingly reduced through re- 
demption. ' ' 

It will be remembered that gold and gold certificates may 
also serve as the basis for such note issues. If banks had 
gold, it was policy during the war especially, to encourage 
member banks to meet their obligations to reserve banks 
in gold. Hence gold and gold certificates have been con- 
centrated in the vaults of the reserve banks, where they 
serve as the basis for note issues up to the value of the 
gold. The credit expansion of war times to meet the needs 
of increased trade and production was thereby made pos- 
sible, because the gold concentrated in the reserve banks 
stood as the basis for continued notes outstanding. Most 
of the gold and gold certificates gravitated into the reserve 
vaults of the reserve banks and have been almost entirely 
withdrawn from active circulation. As stated in the Fed- 
eral Reserve Bulletin of August 1, 1919, "Federal Reserve 
notes have practically displaced gold certificates in circu- 
lation, the latter being drawn into the banks and used as 
reserves, while a corresponding amount of reserve notes 
have been issued to take their place as media of exchange. ' ' 

In popular usage, the various forms of bank note issues 
are considered as money. The various forms of money in 
existence in the United States would, then, be gold, silver 
and other metallic money; Government paper money, such 
as gold or silver certificates; Treasury notes; United States 
notes; National Bank notes; Federal Reserve Bank notes; 
and Federal Reserve notes. The grand total of all these 
forms of money in the United States in 1920 was approxi- 



Money and Credit ^11 

mately $8,000,000,000. This sum is the general stock of 
money in the United States. But not all of this is in cir- 
culation. Something like one-third of the amount is held 
in the United States Treasury and in the banks as assets and 
reserves; the remaining proportion, roughly estimated at 
two-thirds, is in actual circulation. This circulating money 
passes from hand to hand many times during the year. 
The rate of turnover of the money supply is not constant 
from year to year, but studies by Irving Fisher and others 
indicate a rate of turnover ranging near to twenty. In 
other words, the average dollar changes hands in the course 
of a year about twenty times.^ 

Deposit Currency 

It is apparent that money provides a medium of ex- 
change for an enormous volume of trade. Taken by itself, 
the volume is enormous, and yet, in relation to the total 
volume of trade of the country, it is small. The estimates 
made by Fisher indicate that the total volume of trade is 
from twenty to thirty times as great as the fraction which 
is conducted by the use of money as a medium of exchange. 
What, then, is the medium of exchange for this huge bal- 
ance of trade? The answer is, deposit currency.^ The 
deposit loans and accompanying checks supply the medium 
of exchange for the overwhelming preponderance of business 
deals. Consequently, important as an adequate supply of 
money may be in all economic life, there is a vastly greater 
use made of deposit currency as a medium of exchange. 

Prior to the Federal Reserve System, the banks were 
unable to adapt deposit currency to trade needs. Their 
organization was so decentralized, their reserves were so 
scattered, and their individualistic power was so accentu- 
ated that deposit currency was often lacking to meet trade 

1 Kemmerer, "A B C of Federal Reserve System," p. 57 ; Fisher, 
"Purchasing Power of Money," p. 290; Anderson, "Value of Money," 
Chapters 12 and 19; I. Fisher, American Economic Review, 7: 934. 

2 See I. Fisher, American Economic Review, 7 : 935. It should be 
noted that the rate of turnover of deposit currency is two to three 
times as great as for money; e.g., Fisher estimates for 1916 that 
money changed hands about 24 times in the year, and deposit cur- 
rency 60,2 times. 



412 Money and Credit 

needs in time of prosperity. No unified control existed to 
check extremes of speculation, and no adequate concerted 
policy prevailed in time of financial crisis to tide weak 
companies over periods of danger. The deposit currency 
was deficient in elasticity, with the result that farmers 
and business men suffered from sharp swings of the in- 
terest rate, and from inability to secure loans when they 
were most needed, and banks suffered from the extreme 
risks of their individualistic attempts to shoulder the re- 
sponsibilities of large loan deposits in times of emergency. 
The Federal Reserve System has changed the face of things 
in a very substantial way. The key to elasticity under the 
Federal Reserve System lies, first of all, in the method of 
centralizing and mobilizing reserves.^ 

Reserves 

Under the old banking system, banks in large cities had 
to carry a money reserve of 25 per cent., banks in medium- 
sized cities a reserve of 25 per cent., and banks in country 
towns a reserve of 15 per cent. Under the Federal Re- 
serve System, the reserve requirements for each class of 
banks is reduced to 13, 10, and 7 per cent, respectively 
against demand deposits, and to 3 per cent, for all classes 
alike against time deposits. 

Moreover, the Federal Reserve System provides that the 
full legal reserve of each member bank shall be kept in the 
Federal Reserve Bank of its district. This new reserve 
requirement has therefore greatly increased the loaning 
power of the banks. Their capacity to carry loan deposits 
increased immensely when the minimum reserve require- 
ments were cut by the new law. Each Federal Reserve 
Bank is required to hold a minimum reserve of 35 per cent, 
against all of its deposits. This reserve requirement should 
be clearly distinguished from the reserve requirements of 
the member banks. The reserve requirements of the twelve 
reserve banks and of member banks are two distinct and 
separate things. 

These reserve ratios in reserve banks and in member 

iKemmerer, "A B C of Federal Reserve System," pp. 17-18, 64-65. 



Money and Credit 413 

banks combine in such a way as to make the total reserves 
necessary for the banking system as a whole less than these 
ratios, taken by themselves, would indicate. For instance, 
in the case of banks of the large cities whose reserve re- 
quirement is 13 per cent, against demand deposits and 3 
per cent, against time deposits, the Federal Reserve Banks 
holding these reserves are required legally to hold only 35 
per cent, against deposits of bankers' reserve balances. 
Thirty-five per cent, of 13 per cent, is 4.55 per cent, legal 
cash reserve. By the same calculation, the reserves kept by 
Federal Reserve Banks for the banks of middle-class cities 
against demand deposits is 35 per cent, of the 10 per cent, 
requirement, and for country banks 35 per cent, of the 7 
per cent, requirement. Hence for the banking system as a 
whole, the reserves necessary amount to only three to five 
per cent, of total deposits. As a matter of safety, this pos- 
sible limit is not actually reached. A margin above the 
extreme possible minimum is adhered to as a margin of 
safety.^ 

With this arrangement of reserves, the member banks 
are in a position not merely to expand their loans more 
than ever before, but to make their loans elastic enough to 
accommodate trade needs under virtually all normal con- 
ditions. If the commercial bank in any community is faced 
with a high demand for loans, and finds that with its pres- 
ent resources its limit of loans has been reached, it has 
ready at hand a means of solving the problem. One re- 
course is to borrow funds from the Federal Reserve Bank 
of the district, giving collateral security. The reserve bank 
extends the loan for a short period, not to exceed fifteen 
days, and the only permissible collateral is such notes, 
drafts, bills of exchange, or banker's acceptances as are 
eligible for rediscount or for purchase by Federal Reserve 
Banks, and bonds or notes of the United States Govern- 
ment. 

Another recourse is to rediscount commercial paper with 

1 See Moulton, "Financial Organization of Society," p. 483 ; Kem- 
merer, American Economic Review, June^ 1918, Vol. 8, pp. 260-261 ; 
H. L. Reed, American Economic Review, June, 1918, Vol. 8, pp. 270- 
282; Kemmerer, "High Prices and Deflation," pp. 14-30. 



414 Money and Credit 

the Federal Reserve Bank of the district. By this recourse, 
the commercial bank which wishes to secure increased loan- 
ing power sends some commercial paper from its files, such 
as promissory notes, bills of exchange, acceptances, etc., to 
the reserve bank, where the paper is discounted, and the 
amount remaining after the discount is deducted becomes a 
deposit in the reserve bank to the account of the member 
bank. If the member bank were now able to make loans 
only up to the amount of this new deposit, its loaning power 
would be increased, but not to any large degree. What 
happens is that the new deposit which exists with the re- 
serve bank is counted as so much new reserve for new loans. 
The new reserve will serve as the basis of loans, if the bank 
is in the middle class of cities, to ten times the sum of the 
reserve. The new reserve is counted as a basis for new 
loans just as fully as though it were a new deposit of gold 
with the reserve bank. The reserve banks always stand 
ready to rediscount suitable commercial paper for member 
banks. The recourse is always open to the member bank. 
In time of emergency, it can always turn to the reserve 
bank, rediscount some of its commercial paper, and use the 
deposit of commercial paper as a reserve for loans to its 
customers several times that amount. The power to expand 
loans to meet trade needs is consequently elastic. 

Although this practice is available as an emergency re- 
course, ordinarily only a small part of such borrowings by 
member banks actually are used to increase the amount of 
their reserve balances. As the borrowing device has worked 
out in actual practise, such borrowings are in very large 
measure taken in the form of Federal Reserve note issues. 

But, it may well be asked, is there no limit to the loans 
which the reserve banks can make in this way ? If all com- 
mercial banks in a particular district come to the reserve 
bank at one and the same time and ask for collateral loans 
or rediscount loans, will not the Reserve Bank find its own 
lending power overdrawn? In that event, and the event 
has often occurred, the reserve bank has an immediate and 
sure recourse in the system of mobilizing reserves. As has 
been before stated, the reserve banks are required to keep a 



Money and Credit 4^15 

cash reserve of 35 per cent, against deposits. If any one 
reserve bank finds that its loans to member banks are be- 
coming so great as to exceed that ratio, it can turn to the 
Federal Reserve Board at Washington, and through it bor- 
row additional reserves from some of the other reserve 
banks of the country. Some of the other reserve banks of 
the twelve will have an excess of reserves, and will be called 
upon to lend from their surplus of reserves. This possi- 
bility of one reserve bank's being carried over a period of 
heavy loans by a temporary grant of reserves from another 
reserve bank which at the time is in a period of light loans 
enables all of the reserve banks to co-operate to a most 
beneficial degree. This mobilization of reserves between 
districts makes possible the fullest possible utilization of 
the total reserves of the banking system, and enables the 
banks in each district to carry on their operations with the 
assurance that they are not dependent upon their own indi- 
vidual resources, but have back of them the combined bank- 
ing resources of the nation. 

In case all the reserve banks should find their loans be- 
coming excessive for their reserves, the law provides that 
temporarily the 35 per cent, minimum requirement may be 
waived. However, before this extreme stage would be 
likely to arrive, the reserve banks would be able to put a 
check on further loans by raising the discount or interest 
rate. This increase of money rates would make borrowing 
so expensive for the customers of the banks that they would 
be discouraged from making any further additional loans 
than might be absolutely necessary. The provisions of the 
law thus equip the reserve banks to restrain the speculative 
and business loans of the country after a danger point has 
been approached. 

Clearance and Other Functions 

The process of clearance and collection of checks has al- 
ready been described, and it should be clearer now, with a 
more detailed picture of the various phases of the Federal 
Reserve System in mind. The reserve banks, moreover, are 
not confined to dealings with member banks. They may 



416 Money and Credit 

buy in. the open market eligible bills of exchange, bankers' 
acceptances and government securities. Also, reserve banks 
are more and more to become the places of deposit for 
funds of the United States Treasury Department. 

Out of the whole machinery of the Federal Reserve Sys- 
tem, no part arises of more dominating importance than 
the elasticity of deposit currency. Not only can deposits 
be expanded to meet unusual trade needs, but after the 
trade needs have been met the loans become paid up, and a 
due contraction of the deposit currency takes place. Elas- 
ticity involves both expansion and contraction, and the two 
ideals are achieved in a way which is an incalculable ad- 
vance over banking methods before 1913. The Federal 
Reserve System enables the banks of the country to perform 
the functions and services which economic activities de- 
mand, and the law which established the system is one of 
the most constructive pieces of financial statesmanship that 
have ever been placed on American statute books. 

International Banking and Credit 

International commerce has come to be of fundamental 
importance to the economic prosperity of nations, and in- 
ternational banking has developed credit facilities for the 
making of international payments. The estimate has been 
made that "the manufacturing capacity of the country has 
reached a point about 20 per cent, in excess of domestic 
requirements, and on the finding of profitable markets for 
this surplus production depend not only the particular in- 
dustries involved, but the general business condition of the 
entire country."^ Prior to the "World "War, the financing 
of America's foreign trade was largely dependent upon 
European bankers, but with the colossal financial shake-up 
which the war brought, American traders have been put in 
a position which requires that American bankers provide 
the financial machinery for the trade of their own country. 
A transition from domestic banking to international bank- 
ing by American banks has been one of the notable conse- 
quences of the war and post-war periods. 

iG. E. Roberts, Economic World, April 16, 1921. 



Money and Credit 417 

The Principles of Foreign Exchange 

Under the normal peace time conditions of trade before 
the war, the trade between the Great Powers was financed 
upon the basis of the existence of the gold standard of 
money and credit. The currency in circulation in the eco- 
nomic systems of the Great Powers reflected the stable con- 
fidence of the economic community that forms of money 
and credit were convertible into gold. That confidence was 
wrecked by the large issues of paper money, inconvertible 
into gold, in the European countries, and by the large 
shipments of European gold to America in settlement of 
Europe's new accounts as the debtor of America. The 
point should be clear, however, that the principles of for- 
eign exchange commonly assume that the gold standard is 
in operation, and that other forms of money are convertible 
into that metal. 

The exchange mechanism centers around the payment 
for exports and imports between countries by offsetting the 
bank deposits of one country against the bank deposits of 
another, and settling only the balances by shipments of 
gold. The balances which cannot be offset and cancelled 
are, in proportion to the total amount of the accounts, com- 
paratively small, and hence the actual shipments of gold 
between countries in normal times are likewise compara- 
tively small. 

The bank deposits which are cancelled internationally in 
this fashion are primarily in the nature of bills of ex- 
change. To put the process clearly, a very simple illustra- 
tion may be assumed. Two Americans and two Englishmen 
are engaged in international trade. One American buys 
$1,000,000 worth of goods from one of the Englishmen ; the 
other American sells $1,000,000 worth of goods to the other 
Englishman. Then one American owes $1,000,000 abroad, 
the other American is owed $1,000,000 from abroad. Each 
account is carried in the form of a bill of exchange. That 
is, each seller writes an order to the buyer, or on the buyer's 
bank, if arrangement has been made by the buyer to pay 
the amount to the seller. These bills of, exchange are the 



418 Money and Credit 

paper evidences that within a certain period the stated 
sums of money will be paid by the buyers of the goods. 
Who is to wait for the payment to be made? Must the 
seller wait one, two, or three months? The fact of the case 
is that the seller can have his bank wait until the date of 
payment, and can himself obtain from his bank immediate 
money if he so desires. Suppose the two bills of exchange 
for $1,000,000 each come to the same bank. One represents 
money owing by Americans to foreign concerns, the other 
money owing to America by foreign concerns. The Ameri- 
can bank can then collect $1,000,000 from one American 
trader, and pay $1,000,000 to the other American trader. 
Meantime, an English bank can do the same "with the Eng- 
lish side of the transaction. No gold will need to be 
shipped. The bills of exchange can be cancelled against 
each other by the banks of the two countries, and by the 
system of credit instruments the international transactions 
are completed without the passing of gold back and forth. 

The illustration, of course, oversimplifies the matter., 
There are hundreds of importers and exporters in both 
countries, and they are yearly drawing thousands of bills 
of exchange on each other. These bills of exchange pass 
into the hands of the banks and are bought (.and sold be- 
tween banks. There is an open market in banking circles 
for the bills of exchange, and the law of demand and supply 
operates in the sales made practically the same as in the 
sales of commodities in wholesale markets. This fluid con- 
dition of the market makes possible a steady matching of 
bills due to foreigners and bills due from foreigners, and a 
ready cancellation of the great bulk of the accounts without 
the direct shipment of gold between countries. 

But normal exchange is built upon the assumption that 
gold is available at any time, and that balances will be ad- 
justed by gold shipments. The relation of gold to exchange 
is affected by the differing units of money in various coun- 
tries. England's unit of money is the pound sterling, 
which contains the same amount of gold as $4.8665 of 
American money. To put the fact the other way around, 
the English pound sterling contains 4.8665 times as much 
gold as does the American dollar. This ratio is called the 



Money and Credit 419 

par of exchange between the two countries. The French 
money unit, the franc, contains less gold than the American 
dollar. The dollar has 5.18 times as much gold as the franc, 
and this ratio is the par of exchange with France. The 
par of exchange with various countries is therefore the 
ratio between the amounts of gold contained in their re- 
spective money units. 

But the exchange is above or below par a great deal of 
the time, and the fluctuations in normal times reflect the 
demand for and supply of bills of exchange. If New York 
has been shipping huge exports abroad, it will also have 
been drawing a huge supply of bills of exchange on foreign 
buyers. This huge supply of bills, thrown onto the New 
York exchange market, will affect the relations between 
the demand and supply of bills, and the price of exchange 
will fall. Supply and demand shape the price of bills of 
exchange in much the same way as they shape the price of 
wheat or any tangible commodity in the market. If there 
is a large supply of wheat in the country, the price paid 
tends to fall. In the same way, if there is a large supply 
of bills of exchange in the New York market, the price 
offered by those bankers who buy such bills will tend to 
fall. The rate of exchange will drop perhaps to $4,865, or 
even to $4,845. But it would not drop below the latter 
point because it would be cheaper for buyers to pay for 
goods by actual shipment of gold than to use bills of ex- 
change at so low a price. The margin between $4,845 and 
$4,865 represents the cost of shipment of gold between 
countries. It remains true, conversely, that if the supply 
of bills of exchange is scarce in the New York market rela- 
tive to demand, the price will tend to be bid up above par, 
but not above $4,885, because beyond this point it would 
pay to ship actual gold between countries.^ When the 
price of exchange moves either way beyond these limits, or 
the * * gold points, ' ' as they are called, the fluctuations tend 
to be checked by virtue of the fact that it will pay to ship 

1 The figures for the gold points are given here as approximations. 
It is obvious that they change as. the cost of shipping gold between 
countries changes. ' 



420 Money and Credit 

gold between countries. This imminent possibility of gold 
shipment serves to redress the balance of the exchanges and 
keep them within a fairly close margin of the par of ex- 
change. 

The international bankers of one country organize the 
flow of bills of exchange and the clearance of international 
deposit accounts by themselves maintaining deposit ac- 
counts with correspondent banks in foreign countries. The 
making of payments through bills of exchange is conducted 
by the process of transferring deposit accounts back and 
forth between home banks and their correspondent banks 
of deposit abroad. For example, a New York furniture 
exporter ships $1,000,000 worth of furniture to a London 
buyer. The London buyer has his deposit account with a 
London bank. This London bank in turn has a deposit 
account with a correspondent back in New York. The 
London buyer transfers $1,000,000 of his bank deposits to 
the account of the London bank, and the latter in turn 
transfers $1,000,000 of its deposits with its correspondent 
bank in New York to the account of the New York furni- 
ture dealer who shipped the goods. This method of trans- 
ferring bank deposits from party to party and bank to 
bank between countries is essentially the same in principle 
as the method of clearings between banks within a country 
in its domestic credit transactions. 

It remains to be observed that if the discrepancy be- 
tween the demand and supply for bills of exchange should 
remain for any considerable time at a point so great as to 
cause large international shipments of gold, the shift in 
gold reserves between countries will so affect interest rates 
and price levels in the countries concerned as to bring the 
financial and trade relations gradually back to normal, and 
to bring the rate of exchange back approximately to par. 

The supply of bills of exchange in the United States 
drawn on foreign countries arises not only from the expor- 
tation of goods, but also from sales of American stocks and 
bonds to foreign buyers, from loans extended by foreign, 
bankers to American bankers, and from international ser- 
vices rendered by Americans, such as providing foreign 



Money and Credit 421 

travelers in America with funds, rendering legal services 
to foreign concerns, etc. All such international transac- 
tions give rise to a flow of payments from abroad to Ameri- 
can creditors. A demand for bills of exchange, that is, for 
a means of providing an outflow of payments from Amer- 
ica, arises from essentially the converse of these various 
dealings between nations. Before the war, America's ex- 
ports considerably exceeded her imports, and this excess 
represented so much payment due Americans above Ameri- 
can payments due foreigners. This excess value was, how- 
ever, offset by the other factors which affect the supply and 
demand for credit settlements, because Americans had to 
meet heavy interest and dividend payments on the $6,000,- 
000,000 of American stocks and bonds held by foreign in- 
vestors; they had to pay premiums on insurance held by 
foreign companies; they had to pay interest to bankers 
making loans in America ; they had to pay freight bills to 
foreign ship owners who largely carried American goods; 
and they had to meet the expenses of the numerous Ameri- 
cans traveling abroad. The foreigTi payments for Amer- 
ica's huge exports were therefore made partially by goods, 
but also, and to a substantial degree, by numerous other 
forms growing out of a wide variety of services and 
dealings. To quote F. W. Taussig, "During the quarter 
century preceding the great war, we had a large excess of 
merchandise exports. That excess enabled us to meet some 
heavy obligations of our own toward foreign countries. 
Through it we were able to pay the expenses of our tourists 
in Europe, freight charges on our imports and exports car- 
ried in foreign vessels, to meet accruing interest and divi- 
dends on external holdings of our securities, to remit the 
sums which foreigners newly arrived in this country were 
sending to friends and relatives in their home countries."^ 
All this describes the normal conditions before the war. 
Since 1914, the conditions of credit, trade and exchange 
have immensely changed. Soon after the outbreak of war 
in Europe in 1914, the exchange rate for British sterling 
soared as high as $7.00. After the first shock to commerce 

lEconotmc World, Vol. 21, p. 811. 



422 Money and Credit 

and credit was past, orders for war materials came from 
Europe in such large amounts that a vast supply of bills of 
exchange were thrown upon the American market, and this 
supply caused the price of exchange to decline far below 
par. When the decline had reached $4.48, the British Gov- 
ernment interfered with the normal operation of the ex- 
change mechanism, and by various devices arbitrarily 
maintained the exchange rate at a minimum point of 
$4,765. Other European countries followed suit. This 
"pegging" of the exchanges, as it is termed, lasted until 
about four months after the armistice was signed. The 
European governments then released the exchange rates to 
the working of natural forces, with the result that rates 
declined violently. In 1920 the rate of exchange in the 
pound sterling fell as low as $3.18, rose again to about 
$4,00, and in February, 1922, was ranging close to $4.30. 
The decline in the exchanges of other leading European 
currencies has been on an even greater scale. One of the 
greatest declinations has occurred in the German mark, 
which fell from a par of about 24 cents per mark before the 
war to about one-third of a cent per mark in the fall of 
1921. 

The depreciation of exchange has led Europe to make 
huge shipments of gold to the United States. The immense 
volume of gold importations has swollen the reserves of the 
banks in this country, and these swollen reserves have been 
the basis for the tremendous credit expansion in America 
since the beginning of the war. 

'■Gold has practically disappeared from the channels of 
trade of nearly all important European countries and in 
its place we find a group of heterogeneous paper currencies, 
which have been issued frequently in such volume that 
many of them lack any semblance of stability of value. "^ 
The huge issues of paper money, inconvertible into gold, in 
European countries have caused the values to depreciate 
far below normal standards. The purchasing power of 
these countries has diminished as a direct consequence of 
war financing in which the convertible gold standard was 
1 H. A. E. Chandler, Economic World, May 21, 1921. 



Money and Credit 423 

abandoned, and paper money flooded the European cur- 
rency supplies. The reason for the great decline in the 
rate of foreign exchange on American markets lies in the 
extraordinary fall in the purchasing power of the foreign 
currencies. The general theory which accounts for the low 
rates of exchange may be stated as follows: the valuation 
in one country of the money of a foreign country will de- 
pend upon the relative purchasing power of the currencies 
of the two countries. The theory is to the effect that the 
primary reason for the wide divergence of foreign ex- 
changes from their gold parity is found in the relative 
depreciation of currencies in different countries, or, to put 
the same idea in another way, in the relative domestic pur- 
chasing power of the currencies of different countries.^ 
After a careful statistical survey of the fluctuations in 
purchasing power of the currencies of various countries in 
comparison with the fluctuations in exchange rates, the 
Federal Reserve Board has lent its authority to the sound- 
ness of the theory. The pre-war conditions of exchange are 
clearly subject to a drastic alteration in the light of de- 
velopments occasioned by the war. The new economic con- 
ditions amend the principle that exchange will not be able to 
fluctuate to any serious degree beyond the so-called "gold 
points," and the new conditions force the thinking of eco- 
nomic students on the subject onto a new plane. 

The international financial relationship of the United 
States has been transformed by the war. Before the war, 
this country was a debtor nation, owing to Europe through 
investments held abroad and through loans approximately 
$6,000,000,000. Today this country is a creditor nation, 
and a creditor on a grand scale. The United States bought 
back in the neighborhood of $5,000,000,000 worth of the 
American securities which were formerly owned abroad, 
and extended government loans to Europeans to the amount 
of about $10,000,000,000 and private loans on trade ship- 
ments of about $3,500,000,000. In the meantime, the ex- 
port trade of the United States has been so greatly in excess 
of her import trade that an enormous trade balance of 

1 See G. Cassel, Federal Reserve Bulletin, December, 1920, p. 1278. 



424? MoTiey and Credit 

exports over imports has been built up in the last seven 
years, amounting all told to more than $17,000,000,000. 
The United States is heavily a creditor nation ; her exports 
greatly exceed her imports; the rates of foreign exchange 
have departed violently from their normal standards; the 
United States alone of the great economic powers has come 
through the war with her gold standard intact ; all in all, 
the international financial relations of the United States 
are profoundly transformed. 

The new financial status of the United States has made it 
necessary for American banks to finance with their own 
resources the great bulk of America 's foreign trade. Prior 
to the war, London was the center of the world's interna- 
tional banking. Years of banking history had firmly en- 
trenched London banks in the confidence of the business 
men of the world. New York as a center of international 
banking was distinctly subordinate to the great world 
center, London. The new financial status of the United 
States has practically forced American banks to develop 
for themselves international credit facilities on the large 
scale necessary to accommodate America's enormous post- 
war foreign trade. 

Under the pre-war status, the amount of payment which 
Americans made to foreigners annually, in the form of 
interest on securities and loans held abroad, in the form of 
expenditures of American tourists abroad, immigrant funds 
sent home, freights, insurance and the like, came to about 
$500,000,000. America was able to make this payment by 
the excess of her exports over imports. Under the post-war 
status, foreign countries are obliged to remit to the United 
States annually about $600,000,000, because of interest due 
on foreign securities and loans held in America. At pres- 
ent, Europe cannot pay these sums by exports to the United 
States. Europe is so strongly in need of goods from the 
United States that European imports from the United 
States considerably exceed exports to the United States. 
Consequently, the creditor relationship of the United States 
tends constantly to become greater. 

A variety of banking developments have taken place in 
an attempt to equip American trade to meet the new posi- 



Money and Credit 4)25 

tion. Under tlie Federal Reserve Law the Federal Reserve 
Bank of New York has entered into mutual relations to act 
as correspondents or agencies, with the banks of numerous 
foreign countries. Also, national banks which are mem- 
bers of the Federal Reserve System may, under the 
supervision of the Federal Reserve Board, establish 
branches abroad. Under this provision, the National City 
Bank of New York City has established more than forty 
foreign branches, distributed among the strategic commer- 
cial centers of the world. Another extension of foreign 
banking facilities has taken the form of creating and ex- 
panding correspondent relations with foreign banks, and 
the banking relations thus formed provide Americans with 
banking service in virtually every important foreign com- 
mercial and financial center. At the same time, a number 
of banks have expanded their foreign departments greatly 
and their representatives are increasingly spending their time 
abroad in personal study of international credit problems. 

American banks are able to undertake these new finan- 
cial responsibilities because of the new provisions of the 
Federal Reserve Act. The new reserve act authorized an 
acceptance market in American banks, and the result is 
that bills of exchange can be drawn in dollars on American 
banks. In 1920, about $5,000,000,000 worth of acceptances 
were dealt in by American bankers, most of them drawn in 
connection with foreign trade. The acceptances handled 
by American national banks are limited to periods not to 
exceed six months, and such foreign trade as can be financed 
by short-term credits has been facilitated by the new 
American acceptance market fostered under the Federal 
Reserve System. This new market is slow in development, 
but promises to expand gradually and to attain a steadily 
increasing importance. 

In addition to these expanded banking facilities, two 
types of foreign credit corporation have been authorized 
under the Edge Act, and hold large promise for the future 
of American banking. One type undertakes the extension 
of foreign credits by the use of acceptances, and their 
services are broader than those of the merely national com- 



426 Money and Credit 

mercial banks because they are allowed to handle ac- 
ceptances running for periods longer than six months, 
usually about one-year periods. The acceptances, for long 
and short periods, of all types of banking institutions are 
included in the estimated total of $5,000,000,000 for the 
year 1920. International conditions are such that even 
these long-term credits are not adequate to finance the 
needed trade between America and foreign countries. So 
large a number of business houses abroad are under the 
obligation of recovering from their wartime prostration 
that they cannot pay for goods bought from America for 
several years to come. Nevertheless, if these industries 
abroad are to get onto their feet, they must have American 
supplies, and the second type of foreign financing corpora- 
tion is devoted to supplying the long-time loans requisite 
for the revival of such foreign industries. The process of 
credit extension has already been partially described under 
the section dealing with foreign investment trusts. The 
American institutions are authorized to make loans to for- 
eign concerns, using the stocks and bonds of these corpora- 
tions as collateral for the loans ; and, in turn, the American 
institutions are authorized to issue their own securities for 
the investment of the American public. The two types of 
foreign financing have brought into being more than a 
score of American banking corporations. They are under 
the supervision of the Federal Reserve System, and offer 
large services to American foreign trade in the future. 
Owing to the unstable political and financial conditions of 
Europe, the longtime risks of the second type of foreign 
credit have discouraged bankers from organizing such de- 
benture credit institutions. As European conditions be- 
come stabilized, there is good reason to anticipate their 
gradual promotion among American bankers. 

In addition to all these private efforts under government 
incorporation and supervision to cope with America's finan- 
cial needs, there exists the War Finance Corporation, em- 
powered to assist exporters with credit derived from 
government resources. This credit has been used to facil- 
itate the international shipment of agricultural products, 



Money and Credit 427 

and is an important supplement to the other agencies of 
international credit. 

The problem of financing foreign trade is by no means 
solved. Old habits, traditions and prejudices are still 
powerful and often discouraging, but the will and deter- 
mination to undertake the responsibility of providing 
American credit for American trade is certainly apparent, 
and with the mind of American bankers turned in that 
direction there is strong reason to feel confident that the 
new financial status of the United States will be wisely 
established. 

The Dangers of the Credit System 

' * Credit is so delicate a thing that it is dangerous to talk 
about it." This statement by the wartime president^ of 
America 's largest bank suggests that at the very time when 
the credit system is performing the indispensable functions 
which have been described up to this point, it also is loaded 
with possibilities of danger, and even of disaster. 

Business Cycles 

Business depression and financial panic are imminent 
possibilities in the modern price system. The normal state 
of economic life is not an even flow of economic activity, 
but a stage of transition from prosperity to depression or 
from depression to prosperity. Depression automatically 
sets at work forces which breed gradual prosperity cul- 
minating in a crisis, or even in a panic; and the crisis in 
turn automatically sets at work forces which put the eco- 
nomic system through the experiences of depression. The 
pendulum swings from one extreme to another on the aver- 
age every seven to ten years, and the economic history of 
America is replete with these periodic fluctuations. Eco- 
nomic life is never static ; it is always dynamic, always in 
process from one stage to another. The business cycle is a 
paramount feature of all economic calculation. 

The cycles of business are not planned by conspirators, 
but are inherent phenomena in the natural processes of the 

1 F. A. Vanderlip, "What Happened to Europe," p. 98. 



428 Money and Credit 

credit system. Prosperity cannot continue for more than a 
few years at a time because of factors inherent in the credit 
system, factors which the dominating business leaders have 
up to date found no way of controlling adequately. As 
business comes into a state of high prosperity, the costs 
increase faster than the income. Briefly this process takes 
place as follows: Concerns resort to the use of old equip- 
ment, out-of-date machinery, and badly located plants in 
order to fill big orders, and all such manufacturing methods 
involve extraordinary costs per unit of product. "Wages 
tend to rise unusually high, and the efficiency of labor falls 
off. Prices of raw materials rise faster and higher than 
prices of finished products, and interest and discount rates 
ascend on a like scale. The efficiency of management tends 
to decline because of the rush and confusion of overloaded 
business. The expanded business rests very largely upon 
borrowed funds, and as the loans increase they approach a 
point where they threaten to exceed the legitimate ratio to 
bank reserves. A tension in the money market arises, in- 
terest rates gradually increase costs, and a general credit 
stringency prevails. Under these influences, profits suffer a 
reversal. The costs advancing disproportionately eat up the 
margin between total cost and selling price and in numerous 
industries the very prosperity which originally brought fine 
profits evolves conditions which in the end bring drastic 
profit reductions. But the security behind the large loans 
upon which business depends is faith in the ability of busi- 
ness to earn large profits. The threatened reduction of 
profits therefore undermines that element of business con- 
fidence which is the basis of credit. This condition over- 
takes specially unfortunate business concerns first. The 
creditors which have supplied them with loans become 
alarmed and fearful lest their money cannot be repaid un- 
less it is called in at the earliest opportunity. Creditors, 
for the same reason, deem it unsafe to renew old loans or to 
make new ones. Without extensions of credit, the most 
unfortunate industries face a crisis. With the news of 
their jeopardy, the feeling of nervousness and lack of con- 
fidence spreads to other businesses, and a general process 



Money and Credit 429 

of squeezing debtors takes place. The crisis has been 
reached, the apex of prosperity, and the forces which 
brought it about were natural, inherent forces which 
evolved their dangerous consequences as a matter of the 
due and normal course of events. 

The crisis has, in years past, frequently plunged into 
panic. Bankruptcies, failures, financial disasters have oc- 
curred on every hand. It is widely hoped that the Federal 
Reserve System has brought credit under sufficient control 
to avert the outright panic. By the processes already de- 
scribed of mobilizing the reserves of all the banks to come 
to the rescue of those most hard pressed, bank failures are 
reduced to a minimum. By the processes of loaning and re- 
discounting between reserve banks and member banks, the 
banks are able for the most part to rescue business concerns 
at the crucial moment and avoid the extreme calamity of 
bankruptcy. By the . processes of raising the interest and 
discount rates on the loans to member banks for some time 
before the anticipated crisis, the reserve banks can dis- 
courage unwise and speculative loans, and prevent the 
forces of crisis from securing too complete a grip on the 
economic order. The Federal Reserve System is looked 
upon generally as being "panic-proof." But it is not 
looked upon as having the power or the capacity to prevent 
the fluctuations which lead from prosperity to crisis, and 
the ensuing depression. 

The period of depression is a time of recovery and read- 
justment. Business failures increase, unemployment is 
widespread, and consumers out of work have a reduced 
purchasing power and a reduced demand for commodities. 
People are wary of investment in new enterprises, and the 
value of securities reaches a low level. Prices of all com- 
modities tend to fall, interest rates to decline, and wholesale 
and raw material prices tend to drop more than other 
prices. Laborers who can get work increase their efficiency 
in the hope that thereby they will win the favor of their 
employers and will not be laid off. The costs of doing busi- 
ness decrease. The stocks of goods piled up during pros- 
perity are gradually sold out. The consumers ' strike passes, 



430 Money and Credit 

new production is required, bargain prices in stocks and 
bonds invite people to snap them, up and investment re- 
vives, business begins to pick up, expansion recurs, and 
gradually economic life emerges from the depression to the 
first stages of a new era of prosperity. The cycles continue, 
from stage to stage, from transition to transition, normally, 
naturally, persistently.^ 

The most recent industrial crisis occurred in its severest 
aspects during 1920 and 1921. The armistice was followed 
by an outburst of prosperity accompanied by all those un- 
dermining forces which evolve an industrial crisis. Costs 
of production increased, wages went up, efficiency dropped, 
and profits exhibited a marked decline. Prices had risen 
greatly, having reached in such commodities as clothing and 
house furnishings a level of 353 and 331 per cent, respec- 
tively above the level of 1913, and in the wholesale market 
building materials having risen as high as 341 per cent, 
over 1913. These extraordinary prices started a general 
refusal of consumers to buy these commodities, and the re- 
fusal thus begun spread broadcast until a general "con- 
sumers' strike" was in effect in 1920. The expansion of 
bank deposits reached a maximum, and in 1920 the Federal 
Reserve took steps to discourage further loans by increasing 
the discount rate. Unemployment became widespread, 
manufacturers shut down or ran at fractional capacity, and 
a general depression prevailed throughout 1920, continuing 
into 1921. The depression was accentuated by interna- 
tional conditions. The amount of the reparations payment 
to be made by Germany still remained uncertain in 1921, 
and exports fell off decidedly, owing to unsettled economic 
conditions abroad and to limited international credit facili- 
ties.^ 

The business crisis and depression brings in its course no 
small amount of human distress and economic waste. Pro- 
duction of all the comforts and luxuries of life is dras- 
tically cut, and millions of men face the prospect of months 
without income, with all that such a situation means in 
terms of anxiety, poverty, and privation. A psychology of 

1 See W. C. Mitchell, "Business Cycles," especially pp. 475-599, 
2. David Friday, Review of Reviews, February, 1921, pp. 170-172. ^ 



Money and Credit 431 

fear saturates the men in the business world, and the morale 
of workers is dissipated by loss of jobs. Probably no other 
loss in modem economic life, except the loss from war, 
compares with the loss accruing from the extremes of busi- 
ness cycles. To the country as a whole, a depression is the 
cause of almost incalculable waste and of enormous human 
suffering. It brings no substantial good, except as it is 
necessary in dissolving the peak of prosperity and spinning 
the credit system through another cycle. No one hopes to 
eliminate completely business cycles under the credit system 
of modern industry. They are part and parcel of the eco- 
nomic order under the modern price system. But there is 
every right to expect that the extremes of the cycles can 
be substantially alleviated. The Federal Reserve System 
saved the country from a full-fledged panic in the crisis of 
1920, and thereby eradicated from the period of business 
crisis the most painful excesses. No reason is apparent 
why the sufferings of the business cycle cannot be reduced 
materially. It would be foolhardy to attempt to eliminate 
cycles altogether. But it would be equally foolhardy to 
flinch from the plain necessity to stabilize business much 
beyond the present point. Indeed, no one should be blind 
to the fact that the price system is a tremendous challenge 
to the chief operators of the industrial, commercial and 
financial system, — a challenge that industry must be sta- 
bilized more thoroughly. There is still room for transi- 
tional eras, for action and reaction, for a dynamic economic 
life with seasonal and periodic fluctuations between better 
and worse, but the great responsibility of the future is to 
eliminate the grossly wasteful and deplorable consequences 
of crises and depressions. To stabilize business is one of 
the pressing problems of the immediate future, and its mag- 
nitude and importance cannot be overstressed. 

Important proposals which will figure in this evolution 
toward more stable business cannot be discussed in detail 
here, but some of the chief proposals may well be men- 
tioned briefly. The centralization of the banking system 
under the Federal Reserve Banks, with all the methods for 
mobilizing reserves, securing elasticity of credit, and regu- 



482 Money and Credit 

lating the volume of business loans by manipulating the 
interest and discount rate, lias raised to the maximum our 
immunity from downright panics. The Federal Reserve 
System also does much to tide business over the tightest 
pinches of the crisis and even co-operates with them in a 
process of reorganization of their broken down financial 
structure. Secondly, it has been proposed that government 
and railway purchases and improvements be so distrib- 
uted as to provide employment and business orders when 
the period of contraction in private corporate industry 
threatens. Public buildings, highways, and enterprise of 
all sorts could be used as a kind of balance wheel to sta- 
bilize the transitional eras in business. Some private con- 
cerns already announce the possibility of carrying on the 
construction of new buildings and the expansion of plant 
during times when normal production tends to decline, and 
point out the distinct advantage of profiting by the low 
prices of building materials prevailing usually during a 
period of depression. Thirdly, the progress in personnel 
administration made by pioneer concerns during and since 
the war, and the scientific application of psychological 
principles to production, promises a way of stabilizing 
efficiency and labor costs so that during a period of pros- 
perity they will not encroach upon prices and profits too 
rapidly. During the crisis and depression of 1920, it be- 
came known that, although most corporations had suffered 
from unusually high wages and a drastic slump in labor 
efficiency, nevertheless there were a substantial number of 
corporations which had reduced unit labor costs by the use 
of scientific and psychological methods of labor administra- 
tion. If the principles already demonstrated by these 
pioneer corporations can be generally adopted, the new 
control of labor cost and production efficiency will do much 
to stabilize prosperity in economic life. Fourthly, the war 
has more than ever linked America financially and com- 
mercially with foreign countries. With the evolution of 
banking facilities to supply proper credit for foreign trade, 
and with government encouragement and greater private 
interest in organizing foreign markets, there is in process 



Money and Credit 433 

of growth a new stabilizing factor in the form of foreign 
trade. Foreign markets offer an outlet for an excess of 
production above domestic needs, and, rightly controlled, 
promise to alleviate the market restrictions of domestic 
trade. America is therefore taking strides in the -direction 
of a greater stabilization of business to the extent that she 
accepts the opportunity in international commerce which 
the war has thrust upon her. In the fifth place, the infinite 
interrelations of modern business call for the light shed by 
national and international economic statistics. In the past 
the collection of statistical information on all branches of 
production, commerce and credit has been decentralized 
and scattered, with the result that the calculations and 
anticipations of business men have been made partially in 
the dark. The first cure for over-production during a 
period of prosperity would be to make known to all pro- 
ducers just how much of each commodity has been and is 
being produced. The Department of Commerce of the 
Federal Government has announced plans for co-ordination 
and centralization of statistical service for business men. 
The Federal Eeserve Board, through its regular bulletins, 
has already taken important steps in the direction of more 
adequate financial and industrial data. Adequate statistics 
may serve as economic barometers in the calculations of 
business men and should lead to accurate economic fore- 
casting. 

Finally, the proposal to stabilize price levels deserves 
most serious consideration. A recent writer, referring to 
the price changes with the last business cycle, declares: 
' ' The United States has maintained the gold standard with- 
out serious limitation and has reorganized its banking sys- 
tem on approved lines. Nevertheless we have had price 
fluctuations almost as violent as those of the greenback 
period. These fluctuations have caused unmerited suffering 
to millions of families and have heaped unearned riches 
upon thousands. They have caused wasteful struggles, en- 
couraged extravagance among some, and created the class 
of "new poor." They have promoted speculation and re- 
duced the efficiency of management and labor. We are 



434 Money and Credit 

poorer in goods, more quarrelsome in spirit, less ready to 
work because of these fluctuations. All this has happened 
and is irretrievable. But within a few years fresh changes 
may happen just as evil in their consequences. This 
wretched record and this wretched prospect are a grave 
indictment of our present form of economic organization."^ 
The frequent changes in the price level have deep effects 
upon the purchasing power of the income of many classes 
of people. Rising prices, with a rising cost of living, bring 
a struggle among wage earners to have their wages raised 
in order to keep pace with increased prices ; and as soon as 
the peak is reached, and prices begin to fall, employers 
commence to cut wages correspondingly, and wage earners 
suspiciously and distrustfully fight the cutting process. 
The upward and downward swings of the price level serve 
as most aggravating causes of the industrial unrest which 
everybody abhors. Incomes derived from conservative in- 
vestments were practically cut in two by the sharp decline 
in the purchasing power of the dollar during the war and 
after. Fixed salaries likewise suffered a severe dwindling 
in their purchasing power, insurance policies depreciated 
in value, pensions were halved in purchasing power. In a 
period of declining prices, numerous classes suffer in like 
degree. Rising prices virtually confiscate a considerable 
part of the value of fixed incomes, salaries, etc., and of 
property investment. For the protection of conservative 
property interests and for the proper conservation of the 
life and welfare of labor, it is of the utmost importance 
that a greater stabilization of prices be attained. 

A plan very thoughtfully advocated at present is that 
known as ' ' stabilizing the dollar. ' ' The plan is chiefly fos- 
tered by Irving Fisher of Yale University, and has come to 
hold the serious attention of a large number of careful and 
prominent economists and bankers. It rests in large meas- 
ure upon the quantity theory of prices. In its simplest 
terms, the quantity theory states that prices equal the quan- 
tity of money times its velocity of circulation plus the 

1 W. C. Mitchell, American Economic Review, March, 1920, Sup- 
plement, p. 155; See also American Economic Review, Supplement, 
March, 1922. 



Money and Credit 435 

quantity of credit (for the most part, bank deposits) times 
its velocity of circulation, divided by the number of units 
of trade. The velocity of circulation refers to the number 
of times which a dollar changes hands. The rate of turn- 
over of money and credit affects the influence of a given 
amount of money and credit on prices. A large volume of 
money and credit instruments, passing rapidly between 
buyers and sellers and producers and consumers has 
direct effects on price levels. The rate of circulation varies 
greatly from time to time, but statistics at present indicate 
that the rate of turnover for money ranges in the neighbor- 
hood of twenty times a year, and of credit forty to sixty a 
year. The quantity of the medium of exchange in its en- 
tirety, multiplied by the rate of its passing from hand to 
hand, fundamentally determines price levels, so the theory 
runs. 

The influence of the volume of medium oi exchange, 
moreover, depends upon its standard of value, which is 
gold. Paper money or deposit currency is redeemable in 
gold and hence represents the same standard of value as 
gold. This standard of value arises from the intrinsic 
worth of the 23.22 grains of pure gold in each dollar. The 
proposal to "stabilize the dollar" is to change the amount 
of gold in the dollar according as prices tend to go up or 
down. Price levels can be measured by index numbers, 
arrived at by statistical averages of prices from time to 
time. To quote Irving Fisher: "In short, then, our rule 
or criterion of adjustment is simply this : for every one per 
cent, of deviation of the index number above or below par 
found at any adjustment date, we then increase or decrease 
the dollar's weight by one per cent." If it be objected that 
confusion would result from coining gold dollars of varying 
weights, the explanation is given that the gold would not be 
coined, but would remain in bullion form, and would be a 
redemption^ fund for all outstanding paper money and 
credit instruments. As a matter of fact, practically all 
gold coin is now retired from circulation and used as re- 

1 For a clear explanation of the full technical details of this im- 
portant plan see "Stabilizing the Dollar," by Irving Fisher. 



436 Money and Credit 

serves against outstanding forms of currency. Under the 
plan to stabilize the dollar, the amount of gold by weight 
for each dollar would be adjusted by keeping the gold in 
bullion form. 

A sharp controversy over the practicability of this plan 
has raged between different schools of economists and be- 
tween bankers. The proposal is of immense importance to 
the whole price system, and deserves a thoroughly scientific 
analysis, based upon full and complete statistics of finance, 
and a most constructive consideration of the economic prin- 
ciples involved.^ 

The quantity theory of money offers a partial explana- 
tion of the changes in price levels, but there are sharp price 
changes which can scarcely be attributed to changes in the 
quantity of money. For instance, from 1915 to 1917, there 
was a general price increase in the United States of 85 per 
cent., caused largely by the heavy demand for American 
goods in Europe to enable those countries to carry on the 
war. As this extraordinary demand led to higher prices, 
there was a need for an increase in the circulating medium, 
and this increase of money came, but as a sequel to the 
price increase rather than its cause. During the years when 
America was in the war, price increases were substantially 
checked by virtue of the price-fixing restrictions of the 
various war boards. From the armistice until the peak of 
high prices in 1920, the price level rose sharply by a gain 
of more than 60 points. The only exception to this general 
rise of prices appeared in the first two or three months 
following the armistice, when a slight slump in prices oc- 
curred. The causes of the general increase in prices follow- 
ing the war were chiefly the foreign demand for goods to 
replace the stocks of goods depleted during the war, and to 
provide equipment for reconstruction, and, secondly, the 
growing inefficiency of labor with consequent mounting of 
labor costs. The rising tide of prices was turned when a 
psychological transformation took place in the buying pub- 

1 For a statement of criticism of the theory, see Laughlin's "Money 
and Prices"; B, M. Anderson, "The Value of Money," and David 
Friday, "Profits, Wages and Prices"; B. M. Anderson, Economic 
World, Aug. 7, 1920. 



Money arid Credit 437 

lie and the so-called buyers' strike began. The consumers' 
strike, a general effort at thrift and economy, a general 
waiting for prices to come down, dragged the price level 
down substantially during late 1920 and throughout 1921. 
During all these shifts of price levels, there were corre- 
sponding changes in the volume of money and credit in 
circulation and in the rate of turnover, but it is next to 
impossible to ascertain conclusively in each case whether 
the high prices caused more currency to come into circula- 
tion or the increased circulation caused higher prices. 

The quantity theory undoubtedly explains many price 
movements, but does not satisfactorily account for all up 
and down alterations. Changes in the demand for goods, 
either at home or abroad; changes in the psychology of 
consumers ; changes in the psychology of laborers, measured 
in labor inefficiency; changes in governmental restrictions 
on prices, — these and other factors exercise determining in- 
fluences over prices, and should be included in any inter- 
pretation of prices which is comprehensive.^ 

The Dominant Influence of Financial Institutions 

If any of the institutions of economic society can be said 
to be dominant in the active direction and control of all 
phases of the economic structure, they would be the finan- 
cial institutions. All modem business activity is dependent 
upon borrowed funds and currency issues for its main- 
tenance, and loans and money are organized, directed and 
restricted by financial institutions. Investment bankers 
select certain corporations whose securities they put on the 
market, and reject others. The reasons are those which are 
good and sufficient in the eyes of the bankers. If the 
bankers decide to withhold their aid in marketing a con- 
cern's securities, this refusal may make impossible the 
existence of the concern. This dominant position of in- 
vestment bankers is enhanced by the large degree of com- 
bination which exists between bankers. The accusation has 

1 See David Friday, "Profits, Wages and Prices," Chapters VllI 
and IX-, also G. E. Davies, Journal of Political Economy, XXIX, 
pp. 213-222. 



438 Money and Credit 

been made by some authorities that this combination amounts 
to a money trust. In 1912 a Government Investigating Com- 
mittee made a very elaborate investigation of the charges. 
They arrived at the conclusion that the combinations of 
bankers held a financial power which was a menace to free 
competition and which jeopardized the rightful business 
interests of corporations fro^vned upon for any reason by 
the money power, but the Committee admitted that there 
was no evidence that this immense poM^er had actually been 
used in an unjustifiable manner. The appearance of a new- 
comer among industries may mean the threat of severe 
competition against an old concern financed through a 
powerful group of investment bankers. As a means of self- 
protection, the old concern may attempt to scotch the new- 
comer before it is hatched by persuading the bankers to 
decline to market its securities. This is a theoretical possi- 
bility, but the Committee found no conclusive evidence that 
the power had actually been so used. These charges of one 
sort and another have never been well enough established 
by evidence to convince those who were not easily amenable 
to criticism of financial interests generally. Certainly the 
power to give life to favored industries is there, and the 
power to take life away from unwelcome industries is there, 
and probably from time to time the power is exercised in 
questionable ways. But the investment bankers enjoy 
widely the reputation of basing their judgment upon funda- 
mental considerations of safety and security, and to the 
extent that these considerations predominate, the bankers 
are rendering the public an indispensable service in pro- 
viding expert analysis of investments and a medium for the 
placing of money where it will bring income to the owner. 
The making of commercial loans likewise carries a domi- 
nating influence over business houses. A threat to withhold 
future loans for working capital is sufficient to force a 
business into the adoption of almost any policy of reorgani- 
zation, retrenchment, expansion, or what not, which the 
bankers may desire. The charge of combination between 
commercial bankers has rarely been made. The money 
trust is a term applied mainly to investment bankers. The 



Money and Credit 439 

co-operative ejfforts of cominercial banks through clearing 
houses, bankers' associations, and the Federal Reserve Sys- 
tem lead ordinarily to constructive co-operation and are 
remarkably free from dangerous and objectionable discrimi- 
nation. During the post-war crisis and depression, com- 
mercial and investment bankers co-operated in scores of 
cases to tide enterprises which were hard hit over a period 
of reorganization and recuperation. The co-operative ef- 
forts of credit bankers saved scores of business houses from 
bankruptcy, and enabled them to get on their feet again. 
In no previous crisis and depression have the bankers co- 
operated in such constructive ways to avert outright dis- 
asters among suffering corporations. 

Yet the bankers are not free from grave sins of omission. 
Farm credits have not been available promptly and at the 
most favorable rates, and the marketing of crops has suf- 
fered from restricted credit facilities so greatly as to cause 
huge losses to farming populations.^ The bankers, more- 
over, have not facilitated the building of homes by a ready 
supply of credit at moderate rates of interest. Interest 
rates on call money have been at times exorbitant, and 
during the period of recovery from the business depression 
after the war not a few bankers were sharply accused by 
bank officials of exacting unreasonable terms for helping 
prostrated industries to struggle to their feet. Small busi- 
nesses which might prove harmful competitors to old estab- 
lished companies, such as the big steel combinations, the 
packing houses, the mines, or the railroads, and which 
might by this competition weaken the values of the securi- 
ties of these big companies on the Wall Street Stock Ex- 
change or in the investment market, have been too often 
frozen out of existence, so it is charged, by the organized 
bankers. 

A prominent feature of this domination by bankers is 
found in the system of interlocking directorates. At the 
time of the Pujo Investigation in 1912, it was found that 
eighteen of the largest financial institutions were affiliated 

1 See Federal Reserve Bulletin, September, 1921, p. 1030; also, 
"Proceedings National Conference on Agriculture," Jan.-Feb., 1922. 



440 Money and Credit 

by interlocking directorates with each other and with a 
vast collection of industries of all sorts. In all, they held 
"764 directorships in 134 corporations having total re- 
sources or capitalization of $25,325,000,000." Banks are 
glad to have some of their executives on the boards of direc- 
tors of the corporations which they are helping to finance 
because it enables the banks to secure inside information 
steadily on the management of the corporations, and to 
make sure that the interests of investors are amply pro- 
tected. Corporations are usually glad to have prominent 
bankers on their boards of directors. The interlocking di- 
rectorates establish a real community of interest between 
bankers and business men, and concentrate this community 
of interest in high degree. No adequate evidence has been 
produced to show radical abuse of the power created by this 
immense financial concentration. It is equally true that no 
adequate evidence has been produced to disprove the abuse 
of the power. As the Pujo Committee declared, ''the data 
have not been available." The only fact which is com- 
pletely established is that the financial power is enormously 
concentrated, apd at any time might be used in dangerous 
ways. The sense of business ethics and the spirit of social 
obligation which prevails among the leading bankers is the 
only real safeguard against the unwise exercise of their 
financial power. Government supervision has been at- 
tempted, for instance, through the Clayton Act, forbidding 
interlocking directorates between banks, but it is doubtful 
if the new prohibition has materially dissolved the com- 
munity of interest in big banking and big business. The 
influence of the Federal Reserve System upon the social 
use of financial power rests largely upon the high sense of 
social responsibility in the minds of bankers themselves. 
The Federal Reserve System cannot be much better than 
the level of economic responsibility in the spirits of the 
most powerful bankers. The only genuine guarantee that 
the huge financial power will be exercised properly is the 
code of honor among leading financiers, and the psychology 
of the most influential bankers. It is true, then, that the 
institutions of modern banks and corporations tend to 



Money and Credit 441 

throw a concentrated power into the hands of the men who 
control the financial machinery of the country. But it is 
equally true that the power thus created has been in the 
main applied to industry with a substantial regard for the 
protection of investors, the growth of business, and the 
social needs of the country. Undoubtedly the future will 
see a greater development of the sense of social obligation 
among the financiers, and will see credit and money organ- 
ized in ways which will insure larger economic service to 
the country. 

Psychological Foundations of the Credit System 

The central functions of the credit system depend at 
every point upon psychological factors, and it is indispen- 
sable for an adequate conception of financial institutions to 
consider the intangible mental and emotional elements 
whicb are everywhere exerting the profoundest influences. 
The phase of psychological forces which is most conspicuous 
in financial phenomena is commonly called business confi- 
dence. Anyone who might start out in search for a pivotal 
psychological fact about which swings the great wheel of 
all economic and financial activity would need to direct his 
search toward the confidence of the average business man 
that property will be safe, that debts will be paid, that 
loans can be made, that investors will be protected. A con- 
fidence of this sort is not a tangible thing ; it exists only in 
the minds of men. But take away this confidence in each 
man 's mind that other men will behave in certain ways, and 
one has taken away the very heart of that mutual and tacit 
understanding which is the starting point of business calcu- 
lations. As one writer has declared, ''The greatest instru- 
ment of production — ^the thing that really produces modem 
wealth — is not physical things, is not labor, is not manage- 
ment; it is confidence in the future, it is a credit system 
based on the expectation of industrial continuity — an ex- 
pectation that debts will be paid. ' '^ 

A large element in business confidence is the rational 
calculation of the business community. A knowledge of 

1 J. R. Commons, "Trade Unionism and Labor Problems," p. 8. 



442 Money and Credit 

the technique of credit, money and banking gives an under- 
standing of the manner in which men customarily use the 
technique and the results in terms of gain or loss. An ade- 
quate fund of information on the statistics of trade and 
finance in general and of those individual concerns in par- 
ticular with whom each business man has business con- 
tracts is a necessary foundation for all confident expecta- 
tions of safe and profitable business dealings. A cool, 
analytical judgment of the honesty, ability and eccentrici- 
ties of business associates and business rivals is requisite 
for intelligent confidence in the outcome of relations with* 
them. Bankers must constantly attempt to know accurately 
the amount of trust which borrowers deserve and sellers 
must estimate accurately the buyers whom they can trust 
to pay on time. The present and future value of stocks 
and bonds must be measured by technical analysis and such 
measurements become the basis for the confidence of in- 
vestors who desire to place their money in securities and for 
the confidence of bankers who desire to make loans with the 
stocks and bonds as collateral security. Without a real 
degree of faith in the successful outcome of business adven- 
tures, practically no adventures would be undertaken. It 
is the feeling of assurance that business affairs will run in 
certain channels, and that business men will behave in 
certain ways, which makes possible at the outset the busi- 
ness undertakings, great and small, of the whole price 
system. And this feeling of assurance, this strong con- 
fidence in the safety of investments, the profitability of 
enterprise, and the repayment of loans originates in large 
measure from the rational powers of bankers and business 
men. It is critical analysis which convinces financiers of 
all descriptions that they have a reasonable hope of success 
in their undertakings. When critical analysis indicates 
that the institutions of finance and industry are nearing a 
depression, business confidence weakens seriously; and 
when it indicates an approaching period of high prosperity 
business confidence becomes irresistible. 

Critical reasoning and analytical judgment are not, how- 
ever, the only elements in business confidence, and indeed 



Money and Credit 443 

even the best judgment of business men is subject to pro- 
found influences from instinctive forces of which their 
minds are but vaguely conscious. Probably no instinctive 
forces are more influential in swaying the most careful and 
sagacious judgments of financiers and business men than 
those centering about the instinct of the herd and the emo- 
tions and impulses of crowd behavior. Shortly before the 
outbreak of the World War in 1914, the cry went up from 
financial circles that a panic was imminent because of cer- 
tain economic policies of the National Government. Presi- 
dent Wilson declared that in actual fact no extreme depres- 
sion of business existed, but, he explained, certain financial 
interests, by their doleful warnings and prophesies, were 
bringing about a "psychological panic." Even though it 
be granted that business was not satisfactorily prosperous 
at the time, it was obvious that there was a large element 
of truth in the phrase **a psychological panic." In other 
words, the pessimism of financial leaders, when spread 
broadcast, was capable of making the mass of financiers 
think that things were worse than they really were, and of 
disseminating a panicky feeling throughout the groups inti- 
mately connected with the financiers. The herd instinct 
expressed itself among the financial groups in ways which 
are familiar under such terms as contagion, suggestion, or 
imitation. The greatest financiers are primary centers of 
suggestion. Hence, the warnings and counsels of these 
towering figures spread a feeling of firmness, or uneasiness, 
as the case may be, through the financial community. Very 
wealthy men, presidents of leading banks or industrial cor- 
porations, government officials, experts on the statistics of 
finance or trade, exercise a contagious influence over the 
judgments of the financial crowd. When they feel pessi- 
mistic, the bulk of financiers follow suit; when they feel 
optimistic, that is the clue for the rest to follow. In the 
life of the herd, leadership is a central force, and in the 
life of the financial community financial leadership deter- 
mines the tone of credit, the degree of confidence, the degree 
of faith or fear for the future which predominates. 

The mental life of the financial crowd is particularly 



444 Money and Credit 

susceptible to the emotion of fear. The terrific, driving 
energy of fear, its primitive intensity and its domination of 
the whole human being when excited to its higher pitches, 
find a full expression in the minds of financiers as a group. 
Nowhere is this power of fear over the administrators of 
the credit system more apparent than in the waves of busi- 
ness depression and prosperity, in the mental attitudes 
associated with business cycles. The imminence of depres- 
sion strikes the fear of loss or even of bankruptcy into the 
hearts of business men with great force. Each man strives 
to save himself by retrenchment, or liquidation, or rush 
sales, or shutdowns, or other recourses, and the very fact 
that each man is told that everyone else is in the same state 
of fear raises the fear and pessimism of everyone to the 
greatest heights. When the instinctive storm has spent 
itself, and the group mind of the financial community has 
cleared itself of the sharp excesses of fear, other instinctive 
energies come into play, and exert powerful influences over 
the financial mind. In prosperous periods, the instincts of 
acquisitiveness, achievement, power, or constructiveness see 
almost boundless opportunities for successful expression. 
Bankers supply business men with the credit adequate for 
huge expansion projects, for vast extensions of business, 
for speculative undertakings, until great numbers of them 
are carried away by their splendid optimism to all sorts of 
economic excesses. Their minds become intoxicated by 
their emotions, and irrational mental judgments lead them 
into the danger zones of economic life. It is not meant to 
imply that these psychological phenomena are unaccom- 
panied by strenuous use of the rational faculties, nor that 
they have no foundation in the facts of economic produc- 
tion and trade. The significance of the account here given 
is that the facts of trade and the rule of reason are subject 
to profound instinctive and emotional infiuences at every 
turn of financial experience. No other explanation can ac- 
count for the excessive rush, for the fear stampede, carried 
often to unnecessary extremes, toward liquidation on the 
part of the administrators of the credit system during the 
period of depression. No other explanation can account 



Money and Credit 445 

for the extraordinary credulity of these same men in 
periods of great prosperity in giving themselves up to over- 
expansion, ruinous borrowing and excessive risk-taking. 
The conclusion is therefore warranted that the irrational 
influences upon business confidence are no less important 
and powerful than the rational influences.^ 

The keenly felt need for sound foundations of business 
confidence has effected among the banking and credit fra- 
ternity extraordinarily high standards of probity, integrity, 
reliability and honesty. It is among the leaders of banking 
that we find the most emphatic insistence upon a high code 
of business morality. Prominent bankers are men whose 
reputations for absolute honesty in all dealings are unques- 
tioned. They judge the acceptability of clients desiring to 
borrow money in very large measure by the right of the 
clients to a name for unimpeachable integrity. To have 
one's word "as good as gold;" to abide unfailingly by 
both the spirit and the letter of contracts; to pay debts 
promptly and undertake no obligations which cannot be 
met with a certainty; to represent all factors in business 
dealings fairly and truthfully; to be dependable and reli- 
able under all financial responsibilities, — these are some of 
the articles of conduct which the administrators of the 
credit system lay down as minimum and irreducible stand- 
ards. These standards are plainly indispensable for the 
maintenance of a sound business confidence, and sound 
business confidence is plainly indispensable for the main- 
tenance of the psychological bonds which unite all the ele- 

1 An excellent illustration of these psychological influences is 
given by W. P. G. Harding. In the course of testimony before a 
Congressional Committee in August, 1921, he was quoted as saying, 
in regard to the contemporary financial depression: "The Federal 
Reserve Board did not create this financial depression. It saw it 
coming, and got ready to protect things, and people ought to be 
grateful it did so. Now all we need is cessation of pessimism, which 
marks bad times as foolish optimism marks good times. We all 
know now everybody was going crazy in the boom during the Fall 
of 1919. . . . All we've got to do is to get out of everlasting pessi- 
mism and quit saying everything is going to the dogs. Why, a man 
has to put up a good, cheerful face if he wants credit. You can't 
talk to the banker like you do to the tax assessor." 



446 Money and Credit 

ments of money, credit, investment and banking into the 
price system of the present economic order. 

The functions of business confidence should be further 
clarified by a study of the psychological factors involved 
in saving, thrift, and provision for the future. The first 
prerequisite to saving money instead of spending it is the 
confidence that the savings will not be lost, stolen, dissi- 
pated or confiscated. If the man who is thrifty can put his 
savings into insurance policies, savings banks, or stocks and 
bonds, with the reasonable assurance that his savings will 
be secure, there is obtained the condition which encourages 
economy and provision for the future. Financial confi- 
dence in the security of savings is thus the beginning of 
thrift. 

Thrift is, in turn, indispensable in building up the 
gigantic accumulations of capital which characterize the 
corporation of to-day, and which are the tangible sources 
of money and credit transactions. Perhaps the most strik- 
ing feature of the psychology of saving is the fact that a 
more equal distribution of income would gravely menace 
the thrift of the country. As J. M. Keynes states, "The 
new rich of the nineteenth century were not brought up to 
large expenditures, and preferred the power which invest- 
ment gave* them to the pleasures of immediate consumption. 
In fact, it was precisely the inequality of the distribution 
of wealth which made possible those vast accumulations of 
fixed wealth and of capital improvements which distin- 
guished that age from all others, . , , The immense accu- 
mulations of fixed capital which, to the great benefit of 
mankind, were built up during the half century before the 
war, could never have come about in a society where wealth 
was divided equitably,"^ The mass of men find the temp- 
tations to satisfy their instincts by immediate consumption 
so forceful and irresistible that their savings are relatively 
slight. Of course, working classes with low incomes would 
be obliged to starve some of their most urgent instincts if 
they undertook to save in any considerable amounts. Their 
incomes are often too limited to permit of any material 
1 "The Economic Consequences of the Peace," pp. 18-19. 



Money and Credit 447 

saving except by excessive self-stinting on the necessaries 
of life. But when working-class incomes rise above the 
line of minimum subsistence, there is no assurance that a 
proper share of the income will be saved. As a usual mat- 
ter, the worker lives up to his income. Any increase in the 
share of wealth distributed to the working classes must, 
therefore, be surrounded with education in thrift, with 
facilities for placing savings where they will be safe and 
will draw some interest. In short, a more equitable distri- 
bution of wealth would necessitate a constructive move to 
insure that enough wealth would be saved to guarantee 
adequate capital accumulation in the future. 

The paramount motive to saving among the classes with 
low income is the parental motive. Alfred Marshall has 
made clear "that men labor and save chiefly for the sake 
of their families."^ But not even family foresight can 
make large savings from small income. It is estimated that 
the total savings of the working classes amount to barely 
one-tenth of the full volume of savings of the country. 
Higher interest rates cannot be expected materially to in- 
crease the savings of these low income classes, because the 
instinctive pressure for immediate gratification of urgent 
wants eats up the great bulk of their income.^ 

Saving among the so-called middle classes is prompted 
by a variety of psychological forces. Family provision for 
the future is an important motive to middle-class thrift. 
The accumulation of that amount of wealth which will put 
a person into the higher social circles, with accompanying 
prestige and display, is another powerful motive to middle- 
class saving. Middle-class professional and business men 
are accustomed to save and reinvest in their professional 
or business interests, and these "men on the make" thereby 
associate with saving all those instincts which underlie their 
basic ambitions in life. Interest rates are usually minor 
considerations in middle-class saving. "It is probably safe 
to say that if they cannot get a higher rate of interest they 

1 "Principles of Economics," p. 228. 

2 A. B. Wolfe, Quarterly Journal of Economics, Vol. XXXV, p. 23. 



V 



448 Money and Credit 

will taJie a low, without greatly reducing their savings. ' '^ 
Saving by either the low income classes or the middle 
classes usually entails considerable sacrifice, some actual 
abstinence, often real privation. The saving of both these 
classes has lately come to attract the attention of bankers, 
economists and public leaders generally, and the doctrine 
has been widely preached that saving is a virtue of the 
finest sort, and that extravagant spending for immediate 
consumption is vicious and dangerous for general economic 
progress. Thrift therefore is preached almost as a religion 
and is associated with emotions of patriotism. Undoubt- 
edly, it is of the utmost importance to coach these classes to 
the maximum of saving consistent with the reasonable en- 
jojnnent of immediate necessities and comforts, and the 
folk psychology of the future will need to be carefully 
developed in ways which will build up habits, customs, 
ideals and institutions favorable to thrift among the masses 
of people. 

In the matter of saving, the force of imitation very com- 
monly works to an undesired end. People of low incomes 
delight to imitate many of the forms of expenditure of the 
well-to-do. The people of financial prestige, with automo- 
biles, silks, Victrolas, vacations, etc., set a pace which en- 
courages imitation, and in the face of the desire of the 
common man to imitate the expenditures of the well-to-do, 
the preaching of thrift as a religious virtue and economic 
necessity has often discouraging effects. This is especially 
true because it is felt that saving among the well-to-do does 
not require sacrifice or abstinence. To all appearances 
they still enjoy huge immediate consumption, and their 
saving can scarcely be made to look like a deliberate virtue. 
"The higher income classes — say of over $50,000 — save 
mechanically, with little or no sacrifice of present wants. ' '^ 
The savings of these classes are made in large measure re- 
gardless of interest rates. But the fact remains that the 
savings of these classes are made, and are enormous in their 
totals. Their larger savings are not due commonly to any 

1 A. B. Wolfe, Quarterly Journal of Economics, Vol. XXXV, p. 23. 
ilUd., p. 23. 



Money and Credit 449 

superior virtues of thrift, but to the ease of saving out of 
a large income. With the development of the modern 
financial system, corporate industry has come to distrust 
the adequacy of any of these sources of saving. All told, 
they would not provide the needed capital accumulation. 
Corporations rely upon two other sources for capital, — 
namely, undistributed profits and bank loans. To quote 
T. S. Adams, "A large part of the annual harvest of thrift, 
perhaps the largest part, consists of profits earned by busi- 
ness concerns and turned immediately back into business 
or reinvestment in related kinds of productive activity."^ 
To take an illustration, in the slightly more than fifty years 
of existence of Armour and Company, total earnings of 
about $140,000,000 have been turned back into the business, 
whereas only about $30,000,000 have been paid out in divi- 
dends. Over 90 per cent, of the present net worth of 
Armour and Company has come from the reinvestment of 
this surplus, the small balance has come from cash and 
stockholders' savings. Not all companies have gone as far 
with the practice as this particular company, but it is 
nevertheless a commonly accepted business policy of the 
present day, and a main reliance of corporations in secur- 
ing capital.^ Because of this policy, the conclusion is 
drawn by David Friday that "other things being equal, 
capital accumulation is likely to be largest when the share 
which goes to profits is large. The organization of our 
industry under the corporate form and the principles of 
financial management which dominate the corporate insti- 
tution inevitably work to that end. ' '^ 

The other source of capital accumulation, banS loans for 
fixed capital, overlaps in many ways the sources which have 
already been mentioned, but in a substantial degree repre- 
sents a distinctly additional source of capital funds. The 
estimates made by H. G. Moulton indicate that in the year 
1916 the amount of bank loans used for these purposes was 
about $9,000,000,000.* The steady flow of capital savings 

1 American Economic Review Supplement, March, 1915, p. 239. 

2 See A. S. Johnson, 'New Republic, Volume 23, pp. 279-281. 

3 "Profits, Wages and Prices," p. 97. 

* Journal of Political Economy, Vol. 26, pp. 638-663. 



4:50 Money and Credit 

is therefore not dependent merely upon the voluntary thrift 
of individuals, but rests largely upon organized capital 
accumulation by corporations and banks directly. Any 
development of economic life in the direction of a wider 
diffusion of income must safeguard itself against the danger 
of reducing the annual fund of savings. Individual 
economy, even under the present system of highly unequal 
incomes, is not adequate to provide enough savings. The 
psychology of thrift must be definitely expanded, and the 
motives to saving must be thoroughly encouraged and sus- 
tained by new traditions, habits and policies of the financial 
institutions themselves. Such a psychological development 
must be looked for mainly outside of the acquisitive in- 
stincts and the interest rate. A recent writer declares his 
general experience in the following words: "That savings 
are prompted in practically all cases by reasons other than 
the rate of interest is the general belief of bankers.^ 

The fact that the foundations of the institutions of credit 
and finance cannot be understood apart from their psycho- 
logical aspects needs no further details of explanation. 
Both the functions and the dangers of the credit system 
trace their origins back to the instinctive and rational ten- 
dencies of business men. The great rational faculties of 
successful financiers; the omnipresent irrational and semi- 
rational influences upon the mind of the financial com- 
munity; the standards of honor which are held up by the 
administrators of the credit system; the organization of 
incentives to capital saving, investment and accumulation, — 
these factors shape the construction of business confidence, 
and the psychological foundations of the price system. 

iL. D. Woodworth, Economic World, Jan. 22, 1921, p. 118. 



Money and Credit 451 



REFERENCES 

Hamilton, W. H.: Current Economic Problems, parts 5 and 6 

Anderson: The Value of Money 

MouLTON, H. G.: The Financial Organization of Society; Money 
and Banking; Commercial Banking and Capital Formation, 
Journal Political Economy, Vol. 26, pp. 484, 638, 705, 849 

Marshall and Lyon: Our Economic Organization, Chapters 
18-20 

Mead, E. S.: Corporation Finance 

Jordan: Investments; Annals of the American Acadeiny of 
Political Science, The New American Thrift, Vol. 87 

Brandeis: Other People's Money and How the Bankers Use It 

Clay, H.: Economics for the General Reader, Chapters 9-11 

Dewing: Financial Policy of Corporations 

Anderson, B. M., Jr. : Effects of the War on Money, Credit and 
Banking, Bulletins of the Chase National Bank, 1920 ff. 

Burton: Crises and Depressions 

Fisher, I.: Stabilizing the Dollar; Purchasing Power of Money 

Hawtrey, R. G.: Currency and Credit 

Kemmerer, E. W.: The A B C of the Federal Reserve System 

Willis, H. P.: The Federal Reserve; American Banking 

Escher: Foreign Exchange Explained 

York: Foreign Exchange 

KiRKBRiDE and Sterrett : Modern Trust Company 

Chamberlain: Principles of Bond Investment 

Taylor: The Credit System 

Wolff: Co-operative Credit in the United States 

Withers, Hartley: War-Time Financial Problems; Interna- 
tional Finance; Meaning of Money 

Hollander: War Borrowing 

Laughlin, J. H.: Banking Progress; Money and Prices 

Holdsworth, J. T.: Money and Banking i^ 

Scott, W. A.: Money and Banking 

White, H.: Money and Banking 

Fiske, a. K. : The Modern Bank 

Pratt, S. S.: Work of Wall Street 

CONANT, C. S. : Wall Street and the Country 

Jones, E. D.: Economic Crises 

Review of Economic Statistics, Sept., 1920, inclusive Jan., 1921 

Lagerquist, W. E.: Investment Analysis 

Bagehot, Walter: Lombard Street 

Kemmerer, E. W. : High Prices and Deflation; Money and Credit 
Instruments in Relation to General Prices 

Mill, John S. : Political Economy 

Taussig, F. M.: German Reparation Payments, American Eco- 
nomic Review, Dec, 1919, p, 33 



452 Money and Credit 

ViNER, J.: Who Paid for the War? — Journal of Political 
Economy, Jan., 1920, p. 46 

Miller, A. C: Federal Reserve System. American Economic 
Review, June, 1920, p. 181 

Stewart, W. W.: Index of Production, American Economic 
Review, March, 1921, pp. 68 if. 

Wolman: Theory of Production, American Economic Review, 
March, 1921, pp. 37-56 

Sprague, 0. M. W.: Discount Policy of Federal Reserve Banks, 
American Economic Review, March, 1921, pp. 16-30 

Monthly Bulletins of Federal Reserve System 

Mitchell, W. C. : Price Fluctuations, American Economic Re- 
view, Supl., March, 1920, p. 155 

Davies, G. R.: Price Theories, Journal of Political Economy, 
Vol. 29, pp. 213-222 

Keynes, J. M. : Economic Consequence of the Peace, pp. 15-25 

Wolfe, A. B.: Interest Theories, Quarterly Journal of Eco- 
nomics, Vol. 35, pp. 23 ff. 

WooDWORTH, L. D.: Psychology of Saving, Economic World, 
Jan. 22, 1921, pp. 117-119 

Taussig, F. M. : Indeterminate Price, Quarterly Journal of Eco- 
nomics, May, 1921, pp. 396 ff. 

Proceedings National Conference on Unemployment of 1921; 
of American Economic Association, December, 1921 ; Ameri- 
can Statistical Association, December, 1921; National Con- 
ference on Agriculture, Jan.-Feb., 1922 

Annals of the American Academy of Political and Social Science, 
Jan., 1922 

Vanderlip, F. a.: What Next in Europe? 

Friedman, E.: International Finance and Its Reorganization 



PART III 
ECONOMIC ADAPTATION 



CHAPTER XI 

PUBLIC CONTROL 

Economic problems form part of the subject-matter of 
economic science, and questions of progress, of improve- 
ment, of reconstruction, command painstaking thought. 
All problems of economic improvement are fundamentally- 
two-sided ; on the one hand, they necessitate the alteration 
of institutions the better to fit human nature; and on the 
other hand, they necessitate the discipline and education of 
human nature the better to fit institutions. The solution 
of economic problems requires a blending of human nature 
and economic institutions. Economic progress involves 
always the basic element of adaptation between two prime 
factors, men and institutions. W. E. Hocking refers to 
man as *'the only animal that deliberately undertakes, 
while reshaping his outer world, to reshape himself also." 
The human equipment needs discipline and guidance in 
ways which are not degrading or weakening, and needs 
opportunities for expression in ways which represent a ful- 
filment of the primary human instincts and desires, and 
which are safe for society. At the same time, institutions 
need to be made to function in such ways that human 
nature will be neither outraged nor pampered, but will be 
evoked, expressed and satisfied within social bounds. 

Every student comes to economic discussions with certain 
first principles which give him his orientation for economic 
thinking. It is these first principles, these elementary con- 
ceptions mostly bom of family and social traditions, which 

463 



454 Public Control 

need scientific examination. As Justice Holmes profoundly 
observes, ''To have doubted one's first principles is the 
mark of a civilized man." The first principles of the pro- 
gressive and of the conservative differ deeply, and in no 
way more fundamentally than in this respect : the conserva- 
tive-minded thinker inclines to give present-day institutions 
the benefit of all doubts and to assume that liberals or 
radicals, mild or extreme, need discipline to make them 
conform; whereas the progressive thinker inclines to give 
human nature the benefit of all doubts and to assume that 
conservatives or reactionaries need to be forced to reshape 
institutions so that human nature can be freer to follow 
its own bent. Conservatives tend to believe that human 
nature is wrong when it is unruly or dissatisfied ; progres- 
sives tend to believe that laws, organizations, systems, in- 
stitutions, are wrong when men become impatient with 
them. One wishes to reshape human nature by new dis- 
ciplines ; the other to reshape institutions by reconstruction. 
Economic adaptation between these two factors may, of 
course, come about in many ways, — by mere chance, by 
blind drifting, by coercion, by pacifistic surrender, by co- 
operation, by rebellion, by intelligent planning. The eco- 
nomic order is to-day so stupendous in its proportions that 
individual thinkers all too often look upon the course of 
adaptation with a fatalistic despair, and resign themselves 
to the inevitability and ineseapability of economic evolu- 
tion with an optimistic delusion that all will turn out for 
the best some day anyhow. Such attitudes lie behind the 
frequent blunders and futilities in modem economic ad- 
justments. Economic thinking worthy of the name must 
come within the scope of the poiets of view and mental 
processes which are insisted upon by the reconstructed 
philosophy of recent years, — it must be devoted to creative 
adaptation. Adaptation which is safe and trustworthy is 
an act of will, based upon an intelligent analysis of facts. 
It comes from "creative intelligence." To effect a decent 
balance in reshaping human conduct and in reshaping eco- 
nomic institutions calls for the most elaborate scientific 
investigations to ascertain facts and methods, for experi- 



Public Control 4i55 

mentation with alternative courses of economic policy, for 
unlimited research by private experts and public commis- 
sions, for the invention of theories and hypotheses to be- 
tried out and proved or disproved, for the creation of new 
principles of human behavior, for the discovery of new 
ideas bearing upon pressing economic problems. Adapta- 
tion which is sound and wise has to be wrought out by the 
deliberate effort of creative minds. Adaptation involves a 
technique of inquiry, research, experimentation, scientific 
guessing, reflection, observation, analysis, diagnosis, infer- 
ence, hypothesis, testing, and verification. In modern so- 
ciety there are specialists and experts, responsible leaders, 
who are adepts in the use of this technique, or should be, 
and upon them naturally faUs the burden of formulating 
the lines of economic adjustment in their broadest and 
deepest aspects. But any over-reaching in the direction of 
specialization, on the assumption that one class in society 
should do all the planning, and another class all the hand- 
work and none of the planning, would be dangerous. In 
his own individual way and within the limit of his powers, 
every man deserves the responsibility of planning, suggest- 
ing, imagining, and few indeed are the members of society 
who, under proper encouragement, lack that spark of curi- 
osity which seeks satisfaction in ideas, plans, and sugges- 
tions. The caliber of the average individual will be meas- 
ured by the degree to which the latent powers of his human 
equipment are called into creative use. If he is a thing 
accustomed to act always under orders, a being whose 
thinking is done by specialists only, his human equipment 
is bankrupt in regard to those qualities of personality 
which can arise only from self-expression and self-asser- 
tion. So in his individual manner each person in economic 
society must be somewhat creative and original and curious 
if he is to be the best possible member of society. 

If the mass of individuals are to have originality and 
creative ability, each individual must be encouraged to 
make wise new adaptations to his immediate environment 
every day of his life. Obedience and unquestioning con- 
formity is not the first law of life, but rather the first law 



456 Public Control 

of life is individual creative adaptation. The Man must 
be free and able to plan improvements in the system under 
which he moves and works, and he must be constrained to 
that measure of self-control and self-direction which is 
necessary to keep him in tune with his immediate universe. 
The words of John Dewey on this matter are deeply sug- 
gestive: **The best guarantee of collective efficiency and 
power is liberation and use of the diversity of individual 
capacities in initiative, planning, foresight, vigor and en- 
durance. Personality must be educated, and personality 
cannot be educated by confining its operations to technical 
and specialized things, or to the less important relation- 
ships of life. Full education comes only when there is a 
responsible share on the part of each person, in proportion 
to capacity, in shaping the aims and policies of the social 
groups to which he belongs. This fact fixes the significance 
of democracy, . . . Human nature is developed only when 
its elements take part in directing things which are com- 
mon, things for the sake of which men and women form 
groups — families, industrial companies, governments, 
churches, scientific associations and so on. . . . When the 
liberating of human capacity operates as a socially creative 
force . . . making a living, economically speaking, will be 
at one with making a life that is worth living."^ 

As soon as the average person comes face to face with 
this attitude toward economic problems, he naturally in- 
quires: "What is your solution? What is the remedy for 
the difficulties of the economic order? What is your 
answer to the multitude of economic questions which arise 
on every hand ? This kind of inquiry is usual and natural. 
Men are in search of an ultimate solution for the whole 
thing. They suppose that of course each man ought to 
have a theory about the way out of all troubles. Then he 
could say to everybody, Now if only you would adopt this 
scheme, all would be well. If only you would put this 
solution into practice, nothing else would be necessary. 
And the only trouble with such ultimate solutions is that 
people simply do not adopt them. Just that is the futility 
1 "Reconstruction of Philosophy," pp. 209-211. 



Publk Control 457 

of these single ultimate remedies based iipoii an "if only. ' ' 
They assume a human behavior which is contrary to fact. 
It might as well be put bluntly and boldly that there is no 
one simple solution, and those people who pretend to have 
one are obliged to live in an imaginary world where every- 
thing would be all right if only people would not do the 
things which people do and if only men would behave in 
those ways in which they won't behave. Realists who are 
willing to deal with actual human nature and actual insti- 
tutions find that we are confronted with a great bundle of 
economic problems, and bundles within the bundle, and 
bundles within the bundles. Each requires investigation, 
inference, experimentation and creative imagination. 
Problems of co-ordination and correlation between all the 
bundles of problems will come to the front. The world of 
economic problems is teeming with infinite diversity, pecu- 
liarity, individuality, variety, and the realistic mind seeks 
to adapt each to each and each to all. This attitude always 
is a disappointment to many minds, because it gives no 
rock of ages to step foot upon, but instead makes every 
man an explorer, a pathfinder, a trail blazer, a discoverer. 
If it has less certitude, it at least has infinitely more prac- 
ticality. The specific implications of this attitude are so 
ably stated by Dewey that it is well to quote him again: 
"Just what response does this social arrangement, political 
or economic, evoke, and what effect does it have upon the 
disposition of those who engage in it? Does it release ca- 
pacity? If so, how widely? Among a few, with a corre- 
sponding depression in others, or in an extensive and 
equitable way? Is the capacity which is set free also di- 
rected in some coherent way, so that it becomes a power, 
or are its manifestations spasmodic and capricious? Since 
responses are of an indefinite diversity of mind, these in- 
quiries have to be detailed and specific. Are men's senses 
rendered more delicately sensitive and appreciative, or are 
they blunted and dulled by this and that form of social 
organization? Are their minds trained so that the hands 
are more deft and cunning? Is curiosity awakened or 
blunted ? What is its quality : Is it merely esthetic, dwell- 



458 Public Control 

ing on the forms and surfaces of things, or is it also an 
intellectual searching into their meaning? . . . What is 
needed is specific inquiries into a multitude of specific 
structures and interactions."^ 

A convenient classification for the purpose of helping in 
understanding the main directions of economic adaptation 
will be made under the three headings: Public Control, 
Radicalism, Economic Democracy. 

Public Control 

The major economic problems, almost without exception, 
exhibit phases which refer to some form or degree of gov- 
ernment control, and the major policies of modern govern- 
ment almost without exception exhibit phases which refer 
to economic conditions. So politics abounds with economics 
and economics abounds with politics. The extent to which 
government should interfere in business is often a matter 
of bitter debate, and each separate problem has to be dis- 
posed of on its own merits. Those economists who are not 
averse to a liberal measure of governmental control look 
upon government policies not primarily as an interference 
with business conditions, but rather as a means of smooth- 
ing out troubles and injuries arising from unrestrained 
business adventures, and as a means of aiding and guiding 
business toward higher standards. The function of govern- 
ment is not to meddle and intrude where it is not needed, 
but is to co-operate and constrain and direct and recon- 
struct where economic conditions fail to right themselves. 
Referring to this positive responsibility of government, a 
thoughtful political scientist has commented, "The most 
striking change in the political organization of the last half 
century is the rapidity with which, by the sheer pressure 
of events, the state has been driven to assume a positive 
character. . . . And, in the main, it is reasonably clear 
that political good is to-day for the most part defined in 
economic terms. "^ 

Since the World War, the people of the United States 

1 "Reconstruction of Philosophy," pp. 197-198. 

2H. J. Laski, "Authority in the Modern State," pp. 81, 98. 



Public Control 459 

have undergone a marked reaction away from the extreme 
forms of government control of economic affairs. The reac- 
tion is well defined in a catch phrase which has won wide 
currency, — less government in business and more business 
in government. The war emergency brought the basic 
economic activities of the country under close government 
supervision. The Federal Government assumed control of 
the economic life of the nation through a vast administra- 
tive machinery : The Food Administration to conserve the 
supply of foods, restrain prices, and distribute the supply 
where most needed; the Fuel Administration to control 
prices of fuel, and regulate priorities in its use; the Rail- 
road Administration to operate, co-ordinate and unify the 
transportation facilities of the country; the President's 
Mediation Commission, the National War Labor Board, the 
War Labor Policies Board, and other special boards, to 
arbitrate labor disputes, establish industrial standards, 
adjust wages, and secure maximum labor efficiency; the 
United States Shipping Board and the Emergency Fleet 
Corporation to construct ships rapidly, control ships seized 
from the enemy, and to mobilize and direct shipping forces 
of the nation; the War Trade Board and the War Trade 
Council to regulate exports and imports, and to apprehend 
efforts at trading with the enemy; the War Finance Cor- 
poration and Capital Issues Committee to conserve the 
credit resources of the country for industries essential to 
winning the war; the War Industries Board to organize 
the industrial resources of the country for essential war 
purposes; and other special boards to handle war publicity, 
stimulate science and invention, investigate and control 
enemy aliens and their property', construct aircraft, and 
direct war-risk insurance. Most of the war boards made 
large use of the practice of licensing corporations as a 
means of controlling their conduct. Price-fixing, household 
thrift, priorities, and other means of enforcing war poli- 
cies brought the great bulk of the economic life of the 
country under the War Administration. 

The extreme extent of this war control placed the busi- 
ness of the country in a position where its freedom of 



460 Public Control 

initiative and its independent judgment were drastically- 
curbed. Although the business interests were as a rule 
patriotic and willing to submit to superior direction while 
submission was necessary to win the war, nevertheless the 
surrender of their freedom to conduct their private busi- 
nesses was not a pleasant experience, and the minute the 
war was over business men were straining at the leash for 
escape from the rigid restraints of war days. The Presi- 
dent reflected the predominating sentiment of the country 
when, shortly after the armistice was signed, he declared in 
a message to Congress, "While the war lasted ... we put 
every material energy of the country in harness to draw 
the common load and make of us one team in the accom- 
plishment of a great task. But the moment we knew the 
armistice to have been signed we took the harness off." 
The war brought the most comprehensive organization of 
economic life that Americans had ever witnessed, and the 
restraint and subordination which it involved were repug- 
nant to the American spirit of free initiative and inde- 
pendence of action. The American people knew, in no 
doubtful mind, that they did not desire so far-reaching and 
inclusive regulation of their economic life. On the whole, 
the American people were relieved at the prospect of being 
able to scrap the war organization and to return to a gen- 
erous degree of individualism in their business pursuits.^ 
The paramount form of government control is familiar 
under the name of government regulation. Regulation has 
been carried furthest in thoss branches of economic activity 
which are in the nature of public utilities. During the 
last fifteen to twenty years, a group of city, state, and 
federal commissions have grown up to regulate rates and 
services for public utility corporations. Such corporations 
include the telegraph, the telephone, water, light, gas, street 
railways, and steam railroad companies. The railroads 
have been subject to a great deal of scattered regulation 
by the separate states, but of late the supremacy of the 
federal commission over all interstate carriers has been 

1 W. F. Willoughby, "Government Orranization in War Time and 
After," 



Public Control 461 

definitely established. The other classes of public utility 
corporations have for the most part been subjected merely 
to state and municipal regulating commissions. These 
commissions have been indispensable in order to protect the 
public from unreasonable or unfair rates, and from inferior 
and inadequate service. Commission regulation of these 
corporations has come to be accepted as a necessary public 
policy, and the rulings of the commissions have as a gen- 
eral rule been tempered with a commendable fairness and 
reasonableness. 

The principle of regulation has been most fully devel- 
oped in the great interstate railroad systems of the country. 
Railroad transportation is the largest single industry in 
the country in regard to capital invested, labor employed, 
and public importance. The railroads are a key industry 
of the country, and transportation is an indispensable aid 
in the conduct of practically every important business. 

The railroads early developed abuses in the level of rates 
charged, in unfair practices such as rebates, and in the 
quality of the service rendered, and in 1887 Congress 
created the Interstate Commerce Commission. From that 
year until the present time the Commission has functioned, 
and its powers and duties have been defined, enlarged and 
strengthened by several subsequent acts of legislation. 
The latest law of fundamental significance in railroad regu- 
lation is the Esoh-Cummins railroad law passed in 1920. 
This act terminated the period of government operation 
which had been entered upon in 1917 as a war measure, 
and marked out greater powers than had ever before been 
placed in the hands of federal regulating bodies. The main 
features of the regulatory machinery and its powers and 
functions may be given in very brief and condensed form 
as follows: Regulatory power is vested in an Interstate 
Commerce Commission of eleven members, each drawing 
an annual salary of $12,000, appointment being made by 
the President with the consent of the Senate. Terms of 
office are seven years. The Commission is directed by the 
Esch-Cummins law to fix railroad rates at a level which 
will make possible the payment of five and one-half per 



462 Public Control 

cent, dividends on the aggregate value of the carriers' 
property for the two years immediately following the ter-- 
mination of war control on March 1, 1920. Roads which 
earn in excess of six per cent, are required to divide the 
excess equally with the Government. This provision for 
division of the excess above six per cent, is a permanent 
provision, and is not limited merely to the two-year period 
just mentioned. The railroads' share of the excess goes 
into a reserve fund of the railroad, and can only be drawn 
upon for the meeting of dividend, rent and interest charges, 
and for that purpose only to the extent of meeting charges 
up to six per cent, of the value of the railroad's property. 
The Government's share of the excess above six per cent, 
goes to a contingent fund, to be drawn upon to extend 
necessary credits to railroad companies or to purchase 
equipment to be leased to them. The Commission is di- 
rected by the law to follow as a permanent principle in 
rate-fixing the obligation to "prescribe just and reasonable 
rates," so that the carriers as a whole will, ''under honest, 
efficient and economical management and reasonable ex- 
penditures for maintenance of way, structures and equip- 
ment, earn an aggregate annual net railway operating 
income equal, as nearly as may be, to a fair return upon 
the aggregate value of the railway property." The Com- 
mission is to publish from time to time ' ' what percentage of 
such aggregate property value constitutes a fair return 
thereon. ' ' The five and one-half per cent, mentioned above 
is given as the rate of fair return for the first two years 
following the abandonment of war control of the roads. 
Prior to the Esch-Cummins law the Commission had power 
to fix maximum rates, but the new law gave it power also 
to fix minimum rates. This provision enables the Commis- 
sion to prevent the stronger roads from engaging in forms 
of "rate-cutting" which amount to "cut-throat competi- 
tion." These rate-fixing powers are equivalent to what 
would be price-fixing powers in the ordinary line of in- 
dustry. 

The Commission, moreover, has supervision over the is- 
suance of stocks and bonds by railroads, its approval being 



Public Control 463 

necessary before new issues can be made. The guiding 
criterion for the Commission in passing upon proposed 
security issues is whether the new securities are "reason- 
ably necessary and appropriate" for giving proper trans- 
portation service to the public. Another provision refers 
to combinations of railroad companies, and permits com- 
binations by methods constantly subject to the Commis- 
sion's approval, provided such combinations are brought 
about "under a lease or by the purchase of stock, or in 
any other manner not involving the consolidation of such 
carriers into a single system for ownership and operation." 
As soon as practicable, the Commission is directed to pre- 
pare a nationwide plan for the consolidation "of the rail- 
way properties of the United States into a limited number 
of systems," and consolidation of railway corporations in 
ownership and operation are permitted under the discre- 
tion of the Commission. Such railroad combinations and 
consolidations are specifically exempted from all previ- 
ously enacted laws for the regulation and control of trusts. 
This general provision of the Act looks toward a unifica- 
tion and co-ordination of the railway lines of the country, 
and is an outgrowth of the lessons learned in railway 
operation during the war period when unification and co- 
ordination of the lines were of the utmost importance. A 
further set of provisions empowers the Commission to re- 
quire of the carriers during normal times the proper 
amount and quality of service to insure that the transpor- 
tation needs of the nation are reasonably met, and during 
times of stress or emergency to redistribute railroad equip- 
ment and service in any way necessary to meet the demands 
of the emergency period. Complete control of all railroad 
operations would fall to the Commission in case the emer- 
gency were war or the imminent threat of war. A branch 
of this general class of provisions empowers the Commis- 
sion to require the joint use of terminals by various roads, 
and to apply priorities and preferences in the use of rail- 
road equipment when desirable. Old roads cannot be 
abandoned nor new ones constructed without the approval 
of the Commission. These powers constitute in their en- 



464 Public Control 

tirety a comprehensive control over virtually all vital parts 
of the railroad business, and by thus regulating rates, ser- 
vice, finance, construction, competition, consolidation and 
dividends, the Interstate Commerce Commission assumes a 
position of the greatest importance in guaranteeing that 
the transportation facilities of the country shall render the 
public reasonable service under reasonable terms. 

One group of provisions in the Esch-Cummins railroad 
bill establishes regulatory machinery for the adjustment of 
disputes, grievances and relations between the railroad 
companies and their employees. The railroads and la- 
borers may by mutual agreement set up Boards of Labor 
Adjustment to settle all disputes regarding "grievances, 
rules or working conditions." These voluntary Adjust- 
ment Boards are supplemented by a Railroad Labor Board, 
composed of nine members, three each representing em- 
ployers, employees and the public. The powers of this 
national board authorize it to proceed to investigate any 
railroad disputes which are not being adequately taken care 
of by the voluntarily formed Adjustment Boards. Beyond 
this, the Railroad Labor Board has exclusive jurisdiction 
over the final settlement in all wage disputes. The powers 
of the Railroad Labor Board thus comprehend not merely 
the disputes about "grievances, rules, and working condi- 
tions," but about wages as well. The Board has power to 
enter upon an investigation of any dispute which threatens 
to interrupt the operation of the roads, and to make an 
award in settlement of the dispute. The Board relies upon 
publicity and public opinion for the enforcement of its 
decisions. In the early history of the bill, a definite anti- 
strike clause was proposed, enabling the Board to enforce 
all of its decisions, and giving it power to impose fine or 
imprisonment upon employers or employees who might fail 
to obey decisions. This proposed clause was bitterly fought 
by labor leaders, and by some public authorities, so that as 
finally arranged in conference the law excluded the anti- 
strike clause and relied upon public opinion for enforce- 
ment of decisions. Investigation of disputes is compulsory, 
and regardless of whether employees or employers so desire, 



Public Control 465 

the Board is under obligation to make an award and give 
the terms of the award wide enough publicity to create an 
informed public opinion on the case. 

The Railroad Labor Board and the Interstate Commerce 
Commission therefore together hold firm control over every 
important phase of railroad operation. Through these 
agencies public regulation of the greatest public utility of 
the nation is made thorough and far-reaching. The major 
owners of railroad securities and the executives of the roads 
were very eager to recover the lines from the hands of the 
government, and to resume private operation. Private 
operation under such drastic regulation places private 
initiative and competition on a new plane. Competition of 
service is much talked about, and competition in efficiency 
and economy is approved of. But even these forms of com- 
petition are subject to intimate regulation on the part of 
the Commission. The condition of the railroads since the 
enactment of the Esch-Cummins law has not been fully 
satisfactory, and weighty difficulties have appeared in 
securing adequate railroad credits, in effecting adequate 
economies in operation, and in working out satisfactory 
adjustment of labor relations. Not a few authorities feel 
that eventually the present form of drastic regulation will 
lead to outright government ownership and operation. 
Perhaps one of the strongest forces tending in the direc- 
tion of government operation is the force of menacing labor 
relations. The roads and their employees apparently are 
unable to find any basis of common understanding, and a 
state of distrust and suspicion prevails widely. Rumors of 
strikes and threats of strikes are constantly being heard, 
and unless the roads can find ways of adjustment of trou- 
bles with labor the possibility of government operation is 
not a light one. 

The personnel of the Interstate Commerce Commission 
and of the Railroad Labor Board and Adjustment Boards 
has a steady influence upon the success of regulation. For- 
tunately the appointments made are of a nature to com- 
mand a reasonable amount of public confidence. Probably 
a weightier factor in the success of regulation exists in the 



.466 Public Control 

motives and psychology which prevails among both the rail 
executives and the rail laborers. Their reactions and atti- 
tudes and motives determine fundamentally the effect of 
iregulation upon railroad service to the public. On the 
labor side, it should be observed that labor union leaders 
give evidence of a profounder respect for the vital needs of 
the public than they were willing to during the days of 
■1916 when the persistent threat to strike led to the Adam- 
son Act regulating hours of labor. The laborers, however, 
feel a continual suspicion of the owners and executives, 
believing that they are utterly unwilling to grant the la- 
borers adequate wages, adequate union representation, and 
adequate working conditions. This suspicion prevents a 
sound morale among the army of railroad workers, and as 
long as it persists in its present unhealthy degree the trials 
of those who are responsible for regulation wiU be heavy, 
and the service of transportation will be below its possi- 
bilities. On the part of the railroad presidents and execu- 
tives, it is probably accurate to state that the sense of 
public responsibility has materially increased in recent 
years. For the most part they admit the inevitability and 
jiecessity of thorough regulation, and are disposed as a 
jnile to give reasonable co-operation to the regulators. In 
this respect, the "public be damned" attitude is mainly a 
thing of the past, and a ''public be served and pleased" 
attitude is more in evidence. The low salaries paid to rail- 
road executives, in comparison with those paid to the 
largest industrial executives, has led as responsible a rail- 
road official as Daniel WiUard to remind the country that 
ijnder such salary scales the best executive ability will not 
in future years be attracted to railroad positions. Such a 
4rift of the best executive ability of the country toward 
the higher paid industrial positions would leave the man- 
agement of the railroads to second-rate ability. In the 
course of time, such a tendency would severely handicap 
the transportation service of the country. 
. The development of motives among great railroad execu- 
tives is splendidly suggested by a remark by Otto H. Kahn 
pn the railroad career of one of the greatest figures in 



Public Control 467 

American railroad history, Edward H. Harriman: "His 
career was the embodimeiit of unfettered individualism. 
For better or for worse — personally I believe for better 
unless we go too far and too fast — ^the people appear deter- 
mined to put limitations and restraints upon the exercise 
of economic power, just as in former days they put limits 
and restraints upon the absolutism of rulers. Therefore, I 
believe there will be no successor to Mr. Harriman ; there 
will be no other career like his. ' ' The ability of great men 
to harness their capacities in a co-operative enterprise as 
enthusiastically and energetically as they formerly did in 
individualistic effort lies at the base of all questions of 
success in the new era of complete regulation of railway 
enterprise. 

Regulation of banking has been described in detail under 
the chapter having to do with MONEY AND CREDIT. 
At this stage it is enough to point out that the Federal Re- 
serve System establishes a machinery for the regulation of 
banking practice, but that this regulation goes to no such 
extreme as does the regulation of the railroads. The man- 
ner of selection of the directors of the Federal Reserve 
Banks gives to the bankers themselves the real power ii 
selecting the dominant portion of the boards of director^. 
Banking regulation does not come merely from the top 
down, but fundamentally organizes the bankers themselves 
in a co-operative treatment of banking problems. There is 
less government dictation and more self-discipline in the 
Federal Reserve Board. A question which, promises to 
become of increasing public interest relates to the powers 
of the Federal Reserve System in stabilizing business con^ 
ditions and averting the extremes of business cycles. 
Many students believe that a proper regulation of discount 
and interest rates would restrain business from excessive 
expansion in times of prosperity, thereby avoiding ex- 
tremes of depression, and would encourage recovery by 
offerings of credit at low rates during dull business periods. 
This issue is the center of much thought and discussion, 
and a decision in favor of strong powers of this sort in the 
hands of the Federal Board would have deep consequences 



468 Public Control 

for the business community. The traditions of individual- 
ism in banking are against the move, whereas those who are 
not afraid that co-operation and control in this way would 
be paternalistic are more inclined to be favorable. 

General Regulation of Business 

The general regulatory machinery for ordinary business 
activity exists mainly in the Federal Trade Commission 
and in the judiciary. The basic laws establishing definite 
control are the Sherman Anti-trust Law of 1890 and the 
Federal Trade Commission and Clayton Acts of 1914. 
Outside of these statutory laws, the courts have dealt with 
business practices to a considerable extent under the prin- 
ciples of the common law. 

The Sherman Act of 1890 decreed that "Every contract, 
combination in the form of trust or otherwise, or con- 
spiracy, in restraint of trade or commerce among the several 
States, or with foreign nations, is hereby declared to be 
illegal" and that ''Every person who shall monopolize, or 
attempt to monopolize, or combine or conspire with any 
other person or persons, to monopolize any part of 
the trade or commerce among the several States, or with 
foreign nations, shall be deemed guilty of a misdemeanor. ' ' 
The gist of the act concerned itself with combination to 
restrain trade or to form monopoly. For more than a 
decade following the enactment of the law, the interpreta- 
tions placed upon it by the courts made it of slight effect 
upon business combinations, and few cases were brought to 
trial. In 1904 and 1905, the court made a severe applica- 
tion of the law in cases involving the Addyston Pipe Com- 
pany and the Northern Securities Company, the court 
holding that these companies had the effect of a restraint 
upon competition and trade between the States. In 1911, 
the court ordered the dissolution of two of the most power- 
ful trusts ever formed, the Standard Oil Company and the 
American Tobacco Company, on the ground that these com- 
binations caused undue and unreasonable restraint of 
trade. These decisions constituted epoch-marking interpre- 
tations of the Sherman Act by drawing a line of difference 



Public Control 469 

between reasonable and unreasonable, or due and undue 
restraint of trade. Previously it had been assumed that 
all restraint of trade was illegal, but these decisions pointed 
out that a standard of reason must be applied in each sepa- 
rate ease to the acts of a business combination. In any 
new case presented to the court, it became therefore neces- 
sary for the court to determine as a matter of commercial 
fact whether the acts of the business combination under 
question were reasonable or unreasonable restraint of trade. 
The looseness of this "rule of reason" left business men 
with the feeling that they were conducting their business 
under a regime of great uncertainty. Business men could 
not make intelligent guesses as to what the court's notion 
of reasonable restraint might be. 

One very important question had to do with the issue of 
whether mere size itself, if great enough, might be declared 
monopolistic and unreasonable restraint of trade. The 
Supreme Court gave its opinion on that issue in 1915 in a 
decision favorable to the United States Steel Corporation, 
where it was declared: "We dismiss once and for all the 
question of the mere volume or bigness of business. The 
question before us is not how much business was done, or 
how large the company that did it. The vital question is : 
'How was the business, whether big or little, done f "Was 
it, in the test of the Supreme Court, done without prejudic- 
ing the public interests by unduly restricting or unduly 
obstructing trade? The question is one of undue restric- 
tion or obstruction, and not one of volume of trade. " In a 
subsequent decision on the same corporation, rendered 
March 1, 1920, the Supreme Court found the steel cor- 
poration not guilty of unreasonable restraint of competi- 
tion and trade. The government attorneys who were 
prosecuting the corporation were unable to find any inde- 
pendent steel companies who were of the opinion that the 
trade practices or price policies of the company were 
unfair, and not a single independent company wanted to 
testify against the United States Steel Corporation. The 
Court re-emphasized: "The law does not make mere size 
an offense, or the existence of unexerted power an offense, ' ' 



470 Public Control 

The emphatic ring of these court opinions is somewhat 
weakened, and a measure of doubt raised, by a decision in 
1920 dissolving a holding company known as the Heading 
Company, he court based its opinion upon the charge 
that the company had secured "dominating control" of 
certain railroad and coal properties not by "superior and 
enterprising management," but by "deliberate calculated 
purchase for control," and held "that such power, so ob- 
tained, regardless of the use made of it, constitutes a 
menace to and an undue restraint upon interstate com- 
merce within the meaning of the anti-trust act, has been 
frequently held by this court." 

The laws of 1914 were the Federal Trade Commission 
Act and the Clayton Act. The most significant feature of 
these enactments is the creation of a commission to investi- 
gate trade practices and competition policies and to apply 
the principles of government control of business in a flex- 
ible and constructive manner. The Commission is em- 
powered to prevent unfair competition among business 
concerns, and in case the corporation fails to obey the Com- 
mission 's order, it may appeal to a Federal circuit court 
of appeals for an enforcing order. It may conduct investi- 
gations from time to time into the "organization, business 
conduct, practices and management" of corporations, and 
may require corporations to submit reports covering infor- 
mation about their business, and to maintain uniform cost 
accounting systems, open to the scrutiny of the Commis- 
sion. The Commission, moreover, is authorized to inform 
itself as to whether corporations obey the decrees of the 
court under the anti-trust acts, and to report the facts to 
the Attorney-General, It shall also make investigations to 
discover violations of the anti-trust acts, and shall make 
recommendations for the reform of any corporations found 
to be violating the law, ' ' in order that the corporation may 
thereafter maintain its organization, management, and 
conduct of business in accordance with law." The Com- 
mission may utilize the power of publicity as a means of 
controlling the policies of corporations. It may make in- 
vestigations of foreign trade, and may seek out information 



PuhUc Control 471 

in foreign countries bearing upon trade combinations of 
the United States. It is an administrative body for the 
application of the provisions contained in the Clayton Act. 
The Commission has cleared the air for business men a 
great deal by drawing up and publishing lists of fair and 
unfair practices of competition, so that business men may 
know with some definiteness what they will, and what they 
will not, be prosecuted for. 

The Clayton Act proceeds to define two of the most ob- 
jectionable forms of unfair competition, namely, price dis- 
criminations and "tying arrangements," i.e., such arrange- 
ments as requiring merchants to bind themselves to sell 
at certain prices or to buy exclusively from certain deal- 
ers. These types of competition are specifically branded 
as unfair and illegal, and it is the duty of the Federal 
Trade Commission to prevent business concerns from in- 
dulging in them. In addition, the Commission is given a 
blanket authority to prevent any and all forms of unfair 
competition. Also, the act forbids the formation of holding 
companies or of interlocking directorates where the result 
may be to substantially lessen competition or to restrain 
trade or to tend to create a monopoly, and it is the duty of 
the Federal Trade Commission to see that these provisions 
are enforced. The acts of 1914 are a broad constructive 
move in the direction of guiding business instead of merely 
punishing it; of making clear what is legal and what is 
not; and of co-operating with business toward the end of 
securing business methods which are sound public policy 
and in accord with the law. 

The fundamental purposes in the government attitude 
toward business combination and business methods have 
not always been clear and definite. One general purpose 
has been to maintain and safeguard competitive methods 
in business. The decrees of the courts have often defined 
their purpose as being to "restore competitive conditions," 
and the laws that have been passed have lannounced their 
objective as the prevention of restraints upon competition. 
But the competition which is to be preserved is not a com- 
pletely independent and unguided competition; rather, it 



472? Public Control 

is a competition which, is required to keep within certain 
bounds of "fairness." It is a competition, moreover, 
which may be subject to some restraint and suppression by 
business combinations, provided only that such restraint is 
not, in the view of the court, "unreasonable." And the 
new competition allows for a substantial measure of co- 
operation between competing business units. The vast 
extension of organizations such as trade associations is a 
move in the nature of co-operation between the several 
business units in the various lines of trade. Co-operation 
is the life of trade. "Only by co-operation can the enor- 
mous wastes of competition be avoided." Co-operation is 
not the antithesis of competition, but the supplement, and 
an invaluable supplement, in the successful organization of 
modern industry and trade. The element of co-operation 
is encouraged by the government in the railroads of the 
country, under the supervision of the Interstate Commerce 
Commission. It needs to be more definitely approved for 
industry and trade in general ; and clear definitions are in 
need of formulation, of fair and unfair, reasonable and 
unreiasonable co-operation. Co-operation has been estab- 
lished by the terms of the Webb Act for corporations 
entering into foreign trade, and under the terms of the 
Edge Act for banking companies engaged in the handling 
of investments and credits for the financing of foreign 
trade. Misguided co-operation would of course lead to 
forms of monopoly which would be undesirable. In both 
the coal industry and the meat packing industry it has of 
late been seriously proposed to add to existing provisions 
for government regulation to the end that competition and 
co-operation in those industries may be properly balanced. 
The purpose of government control as at present applied 
deserves to recognize the importance of properly blending 
the principles of competition and co-operation in economic 
organization. 

In the past, a primary purpose of anti-trust legislation 
and administration frequently has been the prevention of 
business from growing too large. The popular philosophy 
of business at the time of the enactment of the Sherman 



Public Control 473 

Act in 1890 found big business dangerous and menacing 
because of its very bigness. The provisions of the Clayton 
Act against holding companies and interlocking direc- 
torates are a tribute to the same fear of large industrial 
and commercial power. The Supreme Court has in some 
recent decisions declared that mere size is not in itself ille- 
gal, but doubt as to what is definitely meant by such a 
declaration is raised by such a judicial attitude as was taken 
in 1914 by a Federal district court in decreeing the disso- 
lution of the International Harvester Company. In part, 
that decision stated, ' ' There is no limit under the American 
law to which a business may not independently grow, and 
even a combination of two or more businesses, if it does not 
unreasonably restrain trade, is not illegal; but it is the 
combination which unreasonably restrains trade that is 
illegal, and if the parties in controversy have 80 or 85 per 
cent, of the American business, and by the combination of 
the companies all competition is eliminated between the 
constituent parts of the combination, then it is in restraint 
of trade within the meaning of the statute, under all of 
the decisions. ' ' This comes close to declaring that the com- 
pany unreasonably restrains trade because of its very big- 
ness, in that it controls over 80 per cent, of the business. 
Does size itself constitute unreasonable restraint ? In the 
decision of the Supreme Court in 1920 dissolving the Read- 
ing Company, it was the "dominating control" of the 
company, even though it were in the form of ''unexerted 
power" which figured largely in the logic of the decision. 
The doubtful attitude toward bigness is further revealed 
in a statement by the chairman of the Federal Trade Com- 
mission made in 1918 as follows, **The principal unsettled 
question remaining appears to be whether a monopolistic 
combination with the power to crush its competitors is not 
against public policy and contrary to the law, even though 
it were not shown to have exerted that power." And the 
chairman explains his personal conviction that "In ordi- 
nary industry and trade, however, the maximum social ad- 
vantage is not in concentration and unitary organization, 
but rather in the competition of numerous efficient private 



474 Public Control 

enterprises."^ It at least seems certain that in any eases 
where combination is allowed to attain so great a size as to 
amount to private monopoly, rigid government control 
similar to that provided by the Interstate Commerce Com- 
mission will be applied. 

The history of efforts at business control for more than 
thirty years teaches emphatically that large business estab- 
lishments are inevitable in the present economic period. 
Business units of sufficient size to realize the economies of 
large scale operation are a natural outcome of the economic 
system based upon modem mechanics, science, and tech- 
nology. Economic evolution and social progress alike ac- 
knowledge a place for the large-scale business establish- 
ment. Decrees of dissolution made by the courts have 
proved in large measure futile. Communities of interest, 
holdings of stock in various corporations by friendly par- 
ties, secret understandings and concert of policy spring up 
in one way and another. It often has been doubted whether 
"the mere dissolution of industrial combinations accom- 
plishes anything. "2 The words of VanHise seem thor- 
oughly justified, ** Concentration and co-operation in indus- 
try in order to secure efficiency are a world-wide movement. 
The United States cannot resist it." As fast as one form 
of combination has been attacked by the courts, another 
form has been invented. The pool gave way to the trust, 
the trust to the holding company, and the holding company 
often to the amalgamation, the merger or the community of 
interest. Control of business methods, of forms of co- 
operation and competition, and condemnation of evil busi- 
ness practices have met with a reasonable measure of 
success; but when the attack has been upon mere size be- 
cause of the dangers of size, it has happened that "Not- 
withstanding all the law against agreements in restraint of 
trade, the present generation has seen the greatest .move- 
ment toward consolidation which is recorded in economic 

iW. B. ColVer, "American Problems of Reconstruction," edited 
by E. M. Friedman, Chapter X. 

2 See A. A. Young, Journal of Political Economy, pp. 204-219, 
430-431. 



Public Control 475 

history."^ It is of significance that Great Britain has 
during and since the war given direct governmental en- 
couragement to the organization of business on a compre- 
hensive and adequate scale. The trouble with the attitude 
of the past has been fundamentally that people were unable 
to discern the psychological forces which were working in 
the direction of large business organizations. The develop- 
ment of the resources of the American continent, the possi- 
bilities in the utilization of modern inventions and scientific 
discoveries, the economies and advantages to be realized by 
big undertakings, the seats of economic power that could 
be occupied by those who succeeded in large business or- 
ganization, the achievements which would be a tribute to 
mammoth creative ability, — all these were considerations 
which fired the imaginations of men of genius. The last 
generation has been endowed with not a few men of rare 
and extraordinary capacities, and the opportunities in the 
economic world which stretched out before them set loose 
their unparalleled energies. Men in whom the master in- 
stincts of domination, constructiveness, possession, fame, 
power, and thought were of extreme force were stimulated 
to their highest endeavors by the challenge of economic 
circumstances. People and governments made the mistake 
of supposing that this titanic psychological energy could 
be suppressed or abolished by the enactment of a law or a 
paper dissolution by the courts. Great human energies 
were operating in full force, and when they were balked at 
one point, they found an outlet at other points. The human 
energies of men could not be suppressed ; they could, how- 
ever, be disciplined. They could be guided, directed, and 
brought into the service of the economic needs of the com- 
munity. And, of late, the effort of business control along 
these lines is a truer recognition of the psychology of busi- 
ness combination, and for that reason has a sounder promise 
of success. 

The possibility of making over the forms of expression 
which will give satisfaction to the instincts of great cap- 

1 Bruce Wyman, "Control of the Market," p. 142, 



476 Public Control 

tains of industry is difficult to measure. New standards of 
business honor, new standards of business ethics, new 
standards of business success gradually turn the emphasis 
away from mere money-getting or individualistic attain- 
ment toward economic statesmanship and constructive 
public achievement. There is much reason for believing 
that the following statement of the late George W. Perkins 
is a fair description of the movement of the times: "The 
individualistic period in which we have been living . . . 
quickly brought great fortunes to individuals. Money- 
making has been the one all-absorbing occupation in this 
country for the last forty years. . . . On the whole, the 
individualistic age has not been a success, either for the 
individual, for the community in which he has lived, or for 
the nation. This period is passing away. ... To my mind 
there is nothing in the signs of the times so certain as this. 
I believe the sooner the man of the future understands this, 
accepts it, and prepares to shape his own course accord- 
ingly, the more successful his career will be, the better off 
his country will be, and the happier he and every one else 
will be. . . . Our only decoration — ^the almighty dollar — 
is not as highly prized as it used to be. The man of excep- 
tional ability, of more than ordinary talent, will hereafter 
look for his rewards, for his honors, not in one direction 
but in two — first and foremost in some public work accom- 
plished, and second in wealth acquired. ... In my judg- 
ment the fashion of acquiring wealth simply for the sake 
of possessing it has about reached its greatest height, and 
the fashion of performing public service for the sake of its 
performance is coming into vogue. "^ To the degree that 
this revaluation and rediscipline of motives takes place, the 
economic organization of the country will increase the 
measure of human well-being which prevails, and private 
initiative in public achievement will characterize American 
business life. 

1 E. M, Friedman, "American Problems of Reconstruction," pp. 
50-51. 



Public Control 477 



Governmental Control of Labor 

Labor is so vital a part of productive organization that 
the influence of government control over it becomes of 
importance. Government control of the laborers of the 
railroads has already been described in some of its phases. 
Compulsory investigation of disputes, trusting to public 
opinion for enforcements of decisions is the established 
mode of procedure in the railroads. The State of Kansas 
has attracted much attention by the formation of a State 
Court of Industrial Relations, to settle labor disputes in 
all industries of vital public concern, with powers not 
merely of compulsory investigation, but also of compulsory 
acceptance of the decision. Both the railroad method and 
the Kansas method arouse the bitter antagonism of organ- 
ized labor, because it is felt that the element of compulsion 
will prove to be an entering wedge for forcing men to work 
against their will and for involuntary servitude. The 
fundamental principle in both cases is the uninterrupted 
operation of businesses which are of indispensable and vital 
public service. The psychology of labor caused Congress 
to eliminate a specific anti-strike clause from the Esch- 
Cummins railroad bill, and has deterred other states from 
following widely the precedent of compulsion set by the 
Kansas law. The psychology of labor also underlay a re- 
port made by a special industrial commission appointed by 
President Wilson in 1919 for the purpose of working out 
an industrial reconstruction program. The commission 
contained seventeen members, persons of experience and 
eminence in the country ; and great importance attaches to 
their belief that the wide application of compulsion in the 
settlement of industrial disputes is inexpedient and unwise, 
with the parties to industry in their present mood; and 
that the best mode of maintaining industrial peace and 
co-operation lies in the direction of a nationwide organiza- 
tion of arbitration and mediation machinery, with regional 
divisions, exercising the right of investigation and publicity 
in industrial disputes, but not clothed with compulsory 
powers to forbid strikes. In the big meat packing Indus- 



478 Public Control 

tries, the government established during the war a method 
of federal control of labor relations under the direction of 
a federal judge, Judge Alschuler. The powers of the fed- 
eral judge were extended following the war until the au- 
tumn of 1921, and the Secretaries of Commerce, of Labor, 
and of Agriculture, then approved the termination of this 
federal control upon the understanding that the meat 
packers would establish forms of employee represen- 
tation and joint conference between employers and em- 
ployees for the adjustment of industrial relations. Govern- 
nlent control, moreover, has frequently taken the form of 
injunctions, in such forms as court orders forbidding la- 
borers to strike, or to picket, or to boycott, or to engage in 
some other practice held to be objectionable. The element 
of compulsion in the injunction serves to stimulate extreme 
bitterness on the part of laborers, and they feel almost 
universally that the injunction deprives them of their free- 
dom and rights as American citizens and workingmen. 
The injunction is a measure which ought to be used only in 
tiie last resort, as a means of providing indispensable busi- 
ness service to the public or of protecting just rights of 
employers. Organized labor secured, as a means of pro- 
tecting itself from court restrictions, the insertion in the 
Clayton Act of a clause which stated that ''the labor of a 
human being is not a commodity or article of commerce," 
and that labor organizations are lawful under the anti- 
trust acts, and may not be restrained from "lawfully 
cjarrying out the legitimate objects thereof." Labor 
nnions entertained the hope that this section of the Clayton 
Act would give them a new status of immunity from inter- 
ference by the courts, but subsequent judicial decisions 
indicate that the Clayton Act did not materially alter or 
improve the status of labor organizations. The act em- 
powers them merely to lawfully carry out legitimate 
objects, and it remains for the courts to give their own 
interpretation to the words lawful and legitimate. The 
act seems in no substantial degree to have mitigated the 
power of the courts, through injunctions or decisions, to 
control the practices of labor organizations. 



Public Control 479 

Experience therefore indicates that the situation of thp 
present day calls for the minimum of government compul- 
sion which is necessary to protect vital interests of the 
public, and for the creation under government auspices of 
machinery for nationwide voluntary arbitration and coi^- 
ciliation. The arbitrary suppression of the mass aspira- 
tions of laborers by undue government control would be 
fraught with dangerous psychological results. Where laboj" 
unrest reflects grievances, and where the instincts of 
groups of workers are aroused, a policy of suppression can 
have no other effect than to stimulate unnecessary radi- 
calism, to bring about a balked industrial morale, to stimi^- 
late sulkiness, sabotage, and restriction of production, to 
weaken the ties of Americanism and to make easy the work 
of agitators. The psychology of the mass of workers re- 
quires not merely a closing of certain channels of human 
expression which society deems dangerous, but also the 
opening of other channels for the satisfactory expressiojn 
of the powerful human impulses of labor. When bad ex- 
pressions of basic labor instincts have to be stifled, good 
expressions for the same instinctive energies need to l|e 
created. ^ 

Reform "^ 

t 

In a general way, reform refers to those efforts to ir^- 
prove human affairs which take their initiative from leaders 
and authorities who are desirous of helping the mass of 
their fellowmen. Reform is not primarily a democratic 
method because it does not exact responsible effort and 
alert self-expression from the people who are to benefit 
most by it. Reform extends a helping hand from the top 
down more than it builds a self-earned and self-created 
improvement through the democratic organization of people 
from the bottom up. Society abounds with social students, 
public-spirited citizens, altruistic business men, or political 
leaders anxious to serve their fellowmen, who are con- 
tinually busy effecting reforms for the good of society. 

Most reform efforts of the present day are directed 
toward economic conditions, and a great proportion pf 



480 Public Control 

them seek their ends by the medium of political legislation. 
Labor legislation is a leading type of reform, and numerous 
organizations exist for the furtherance of such legislation, 
conspicuous among which is the American Association for 
Labor Legislation. Labor reforms include laws establish- 
ing minimum wages; prohibiting child labor; protecting 
women in industry ; assuring workmen 's compensation and 
insurance, accident prevention ; fire protection and sanitary 
working conditions; regulating hours of labor and night 
work; maintaining factory inspection; requiring proper 
working conditions; supplying adequate housing; restrict- 
ing the immigration of alien labor; organizing Americani- 
zation; creating industrial commissions; providing employ- 
ment agencies; and endeavoring to help the worker by 
every device conceivable to the mind of a reformer. 

There are numerous societies and associations whose 
function is to spread publicity in favor of some reform, or 
to bring pressure to bear on legislators, or to bring direct 
help to people in trouble. These societies include such 
different agencies as the Consumers' League, the Federal 
Council of the Churches of Christ in America, the Ameri- 
can Child Hygiene Association, the American Home Eco- 
nomics Association, the Child Welfare League of America, 
the Intercollegiate Socialist Society, the Industrial Y. M. 
C. A., the National Conference of Social Work, the Na- 
tional Women's Trade Union League, the Russell Sage 
Foundation and other foundations, or bureaus of indus- 
trial, social and economic research. Almost every field of 
economics has its set of leagues and societies devoted to 
reform. 

The work of reformers is of genuine service, for it pre- 
vents in large measure low standards of human treatment 
in the economic world, it alleviates suffering, and it arouses 
a dormant public to face industrial wrongs and provide 
remedies. The body of welfare legislation, of uplift work, 
and of reform organization has raised the level of comfort 
and happiness in the nation and deserves high recognition. 
It is important, however, to note the limits within which 
most reforms take effect. Reform is not a unified compre- 



Public Control 481 

hensive program, but is a bundle of particularistic pro- 
grams, each sponsored by certain groups of individuals 
"wbo devote their energies to the accomplishment of mis- 
cellaneous or single reform acts. In the meantime, the 
economic institutions remain fundamentally unchanged, 
and in their normal functioning result in a fairly steady 
output of the troubles, distresses, injuries and wrongs 
which reformers can only lighten or alleviate. A great deal 
of reform seeks to extend the helping hand, but does not 
reshape the institutions of the economic order in such ways 
as to insure the institutional elimination of the difficulties. 
Reform is often subject to the defects common to all wel- 
fare work. It is in the nature of public benevolence rather 
than of self-expression. As long as the status, powers and 
rights of the various classes in economic organization re- 
main substantially unchanged, the reform movement neces- 
sarily works near the surface of things. It is useful and 
indispensable, but faces certain limits of effectiveness. 

Moreover, it is true of a large class of reforms that they 
rest upon an inadequate view of social psychology. This 
class of reform aims to give pleasure, safety, comfort, and 
happiness to social groups. Trouble is to be abolished, 
danger and risk is to be eliminated, war and struggle to be 
ended, minimums of food and luxuries to be guaranteed, 
poverty to be wiped out, fear, oppression and autocracy to 
be destroyed. The new age that this type of reform looks 
forward to is one of contentment, harmlessness, leisure, 
gentleness, kindness, and security. All of this is to be a 
gift, coming from reform leagues and societies, or from 
acts of legislation. But such a state of peace and piety and 
plenty offers no satisfaction to many of the basic instincts 
of human nature. Men and women do not want gifts of 
pleasure; they want opportunities to win economic and 
social advance by the assertion of their own human powers. 
Men and women need a cause which they can be devoted to, 
and through loyalty to the cause, through struggle for the 
cause, through self-sacrifice and heroism and hazard for the 
cause, they desire to win and create their own betterment. 
The victories and rewards which come from self-assertion 



482 Public Control 

are real. Men need challenges to invent new social and 
economic principles and measures, and need opportunities 
to hew out progress by the strokes of their own hands. The 
society often portrayed by a certain class of reformers is a 
complacent haven of refuge, but men cannot live the strenu- 
ous life in such a society, and anything short of the strenu- 
ous life cannot satisfy the deepest instincts of human 
nature. Reform movements of this kind largely ignore the 
fundamental human cravings for zest, risk, responsibility, 
self-achievement, group loyalty, resourcefulness, sacrifice, 
domination, power, struggle, conquest. Of course the 
sounder reform movements avoid the mistaken social psy- 
chology of ease and comfort, but it is important that the 
bulk of reform effort should rest upon a correct interpreta- 
tion of human nature. Reform in the deepest sense of the 
word should mean not merely a gift from society to needy 
groups, but an organization of opportunity for self-achieve- 
ment, and for group advancement by the creative effort of 
all members of the group. 

The spirit of reform is a splendid reflection of the 
genuine feeling of human kindness, and the harvest of such 
a spirit certainly commands admiration. Not a few groups 
in society are deficient in the virile instincts and the powers 
of self-assertion and achievement, and the protecting care 
of society over them is an indication of a high state of 
civilization. There is no disparagement of the inner value 
of reforms as a whole, in pointing out some of the limits 
under which certain classes of reform have worked in the 
past or in indicating the misleading notions of human 
nature which underlie certain reform movements. The gist 
of these remarks is that a reconstruction of reform pro- 
grams that would reckon more positively with the limits of 
reform effort and that would incorporate the scientific prin- 
ciples of modern social psychology would greatly increase 
their power and usefulness. 

Public Opinion and Public Control 

References have been made to the power of public 
opinion as a means of effecting fair business practices under 



Public Control 483 

the administration of the Federal Trade Commission and as 
a means of enforcing decisions bearing upon labor disputes. 
Public opinion is commonly thought of as an opinion 
which is right. Pitiless publicity is often suggested as a 
measure for bringing about adequate remedies of economic 
wrongs and troubles. And it is ordinarily observed that 
an economic policy cannot long endure or a method of 
government control prove effective unless it can secure the 
support of public opinion. It is appropriate, therefore, to 
give some analysis to the function and behavior of public 
opinion in economic matters. 

First of all, public opinion is scarcely competent to pass 
upon technical economic issues. On matters of business 
ethics or of labor grievances, public opinion is swayed pri- 
marily by head lines, and only very remotely by the body 
of technical facts which bear upon the issue. For instance, 
a federal judge who would dissolve a corporation on the 
basis of what he had read about it in the newspapers, or an 
arbitrator who would decide a wage dispute from his 
knowledge of the press headlines, would be obviously dere- 
lict in his duties because he would be acting without any- 
thing like adequate evidence. Yet the judge or the arbi- 
trator would be acting upon exactly the same evidence as 
serves to form public opinion. The broad spirit of public 
opinion as it might relate to the Tightness or wrongness of 
profiteering or of a certain standard of living as a basis for 
wage adjustments, would have real value, but the deter- 
mination in any particular case of what per cent, of profit 
is profiteering would rest upon a technical analysis of 
capitalization, invested capital and other matters of fact, 
and the determination of a living wage, or what wage would 
assure the proper standard of living would rest upon a tech- 
nical analysis of statistics of prices and cost of living, of 
family budgets, and similar facts. Clearly, the determina- 
tion and analysis and interpretation of such evidence is 
beyond the competence of public opinion. 

From another standpoint, public opinion is not allowed 
to form itself freely, without bias or misbalaneed informa- 
tion. The Federal Trade Commission gave publicity to its 



484 Public Control 

findings about the profits of the meat packers, hoping that 
public opinion would eliminate profiteering. The meat 
packers countered by running expensive advertising in the 
newspapers and spreading broadcast pamphlets to inform 
the public that their profit amounted only to a small frac- 
tion of one cent out of every dollar of sales. As a result, 
the publicity of the Federal Trade Commission was neu- 
tralized and public opinion was confused and ineffective. 
Business concerns or labor organizations which have in- 
terests at stake conceive it to be their right and duty to use 
every effort to shape public opinion in the direction which 
they desire. Hence there has developed the modern art of 
propaganda. People who once doubted the power of propa- 
ganda had those doubts removed during the war by the 
obvious effects of war propaganda. Since the war, nearly 
every large corporation has a publicity official whose duty 
it is to spread broadcast information of a nature to win the 
good will of the public ; and labor organizations from time 
to time have announced the appropriation of huge sums to 
be devoted to arousing a sympathetic public opinion. 
Publicity in such cases is a refined name for propaganda. 
The public stands between a cross-fire of propaganda, and 
it would be amazing if the perfectly human public did not 
reflect this situation in its opinion on important matters. 
Propaganda takes advantage of every known device of irra- 
tional appeal, of unconscious suggestion, of instinct excita- 
tion, and the value of public opinion as a help in settling 
baffling problems has to be discounted to the extent that 
propaganda is misleading. 

Public opinion as an arbiter of disputes between labor 
and capital is subject to all these limitations in degrees 
which vary from case to case. Doubtless in most labor 
disputes the superior power of propaganda lies with em- 
ployers. Often employers carry large advertisements in 
the daily press during a time of strike, to arouse public 
opinion in their behalf. More important than this, the 
whole social philosophy and economic background of news- 
paper managers and editors tends to make them uncon- 
sciously the allies in sympathy and reasoning with em- 



Public Control 485 

ployers and naturally their headlines and editorials tend to 
reflect their fundamental and unconscious bias. Charges 
are often made that newspapers are intimidated by busi- 
ness men who patronize their advertising' columns into pub- 
lishing only news favorable to their interests, but such 
charges are rarely proved by concrete evidence. Beyond 
these considerations lies the fact that in the very nature of 
public psychology the primary concern of the public is un- 
interrupted operation of business. The public wants peace 
and quiet, order and smoothness. The public as a rule 
would rather have industrial peace at almost any price 
than arouse itself to a study of troublesome conditions and 
to a careful act of industrial reconstruction. The public 
wants to be let alone ; hence it is ordinarily the ally of the 
status quo in industry. Labor comes with the sword and 
attacks the status quo. Most labor demands are for a 
change. Labor is on the aggressive and just as in interna- 
tional warfare the nation which starts the trouble alienates 
the sympathy of neutrals, so in industrial disputes, the 
group which starts the dispute and takes the initiative 
tends to alienate the sympathy of neutral public opinion. 
Neutral opinion usually sympathizes with whomever is on 
the defensive and turns against whomever is on the offen- 
sive. In most industrial disputes, capital is on the defen- 
sive and labor on the offensive. It results therefore that 
the weight of public opinion tends to the maintenance of 
things as they are. It is marked more by a leaning toward 
habit, custom and inertia than toward newness of thinking, 
alteration of conditions, and change of policy. From 
labor's standpoint, the public wants peace more than jus- 
tice, and industrial quiet more than the active righting of 
industrial wrongs. These limits to the value of public 
opinion in industrial disputes need to be recognized when 
opinion is assigned the role of arbiter between labor and 
capital. 

This account of the case should not be allowed to belittle 
unduly the true importance of public opinion in the role 
which it is competent to play. The public is the injured 
party in industrial struggles and its determination to pro- 



486 Public Control 

tect itself from unjust interruption of business service de- 
serves right of way. The ideas in the mind of the common 
man deserve deep respect, and there is no intention here to 
repudiate public opinion as a useful force in the control of 
modern business. But the limits of public opinion need to 
be taken into account ; its natural lethargy and inertia rec- 
ognized; its vulnerability to the skilled presentation of 
propaganda understood; and its unconscious social and 
economic bias properly measured. Public opinion on eco- 
nomic issues needs constant education and leadership, 
needs to be aroused by responsible authorities and informed 
by agencies which are interested in true publicity rather 
than mere propaganda. The estimate of public opinion 
by Viscount James Bryce in his work on Modern Democ- 
racies states the matter in admirable proportions: "The 
value of public opinion depends on the extent to which it 
is created by that small number of thinking men who pos- 
sess knowledge and the gift of initiative, and on the extent 
to which the larger body, who have no initiative but a 
shrewd judgment, co-operate in diffusing sound and tem- 
perate views through the community, influencing that still 
larger mass who, deficient in knowledge and in active in- 
terest, follow the lead given to them. . . . Two dangers 
threaten ... all modern democracies. One is the ten- 
dency to allow self-interest to grasp the machinery of gov- 
ernment and turn that machinery to its ignoble ends. The 
other is the irresponsible power wielded by those who sup- 
ply the people with the materials they need for judging 
men and measures. That dissemination by the printed 
word of untruths and fallacies and incitements to violence 
which we have learned to call propaganda has become a 
more potent influence among the masses in large countries 
than the demagogue ever was in the small peoples of former 
days. To combat these dangers more insight and sym- 
pathy, as well as more energy and patriotism, are needed 
than the so-called upper and educated classes have hitherto 
displayed."* 

1 Pp. 456-457, 459-460. See Chapters XV and LXVII, 



CHAPTER XII 

ECONOMIC RADICALISM 

There exists in every economic organization a group of 
people who, because of certain characteristics which are 
more or less common to them, come to be looked upon by the 
rest of the economic organization as "radicals." Some of 
the most noticeable characteristics of the members of rad- 
ical groups may be outlined briefly as foUows: (1) The 
evils and faults of society look bigger to them than to the 
average person; wrongs tower into outrages, economic de- 
fects cry out with indecencies, and the troubles and wants 
of the less fortunate classes of society loom up into atro- 
cious evils and glaring crimes against humanity. (2) 
Radicals as a rule are more impatient for correction of 
economic faults than the average person. Delay is in their 
eyes criminal procrastination, and the faults of society re- 
quire quick and effective action. (3) Radicals as a group 
place great stress upon the right of freedom of thought, 
freedom of the press, freedom of speech, and freedom of 
agitation. The vocabulary of radicalism emphasizes and 
re-emphasizes the word freedom from first to last, — a per- 
fectly natural rationalization of their burning desire to be 
immune from restraint in preaching and spreading the 
doctrines of radicalism. (4) Radicals demand changes 
which are more drastic and overhauling than appeal to the 
ordinary man. They look upon mild reforms and ordinary 
reconstruction as mere patchwork; what they want is a 
transformation of society, a remaking of fundamentals, a 
complete remodeling of economic structure. (5) Radicals 
give every appearance of feelings of bitterness and hate 
toward classes who stand in their way. They dwell upon 
pictures of the class war, and the class struggle, and antici- 
pate the destruction of a class of oppressors. For the mass 

487 



488 Economic Radicalism 

of people, for the labor groups especially, they evince 
genuine love and sympathy, and this is all the stronger 
reason why they show hatred of oppressors. (6) They 
look forward to an organization of economic society in 
which group action shall predominate, and collective and 
co-operative institutions shall supersede private business. 
Political groups and non-political co-operative groups com- 
pose the anticipated structure of their rebuilt economic 
society. (7) Kadicals place great faith in the willingness 
of the individual under the radical regime to subordinate 
self-motives to social motives, and to abandon desires for 
selfish acquisition or aggrandizement in order to make way 
for motives of public service and the common good. It is 
foretold that under the radical regime public-spiritedness 
will be paramount. 

These characteristics of radicals naturally set off the 
people who hold them as unique and queer, and as dif- 
ferent and dangerous. Some people feel that the only ade- 
quate treatment for such specimens of humanity is to jail 
them, lynch them, shoot them, or deport them. There come 
from time to time waves of popular feeling when this atti- 
tude takes possession of nearly the whole of society. Such 
an outburst of public feeling came during the years imme- 
diately following the World War. Even during these waves 
of feeling, however, there are certain groups which take 
the stand that radical doctrines are after all not harmful 
if they are treated intelligently, and that if radicalism is 
empty and has no basis in fact, it will die a natural death, 
or will draw an insignificant band of followers, while 
if it has any basis in fact, society can quietly and in an 
orderly manner correct the wrongs, and thereby draw the 
sting out of radicalism. In ordinary times, the group of 
people who act upon this interpretation of the radical 
movement are usually the predominant group. 

There are distinguishable shades or degrees of radical- 
ism. Some are moderate and patient, and although they 
believe in drastic changes, they are willing to take time in 
reaching them. Economic evolution is their principle of 
action. Others speak of evolutionary revolution, indicating 



Economic Badicallsm 489 

that they want revolutionary changes in economic struc- 
ture, and although they -will proceed by law and order to 
secure the changes, yet at the same time they will hurry up 
the process of evolution, and speed the day of drastic trans- 
formation with all their might and main. Others plan for 
a great upheaval, for a bloodless revolution, for the seizure 
of all things by the emancipated classes and the surrender 
of the oppressors. And still others deliberately calculate 
on force and violence as the means of overthrow of the 
capitalist power and the rule of the working classes every- 
where. 

Radicalism has not merely its various shades and degrees, 
but also its various parties, or schools of thought. Radical- 
ism is about synonymous to most people with socialism, 
but socialism and radicalism have so many divisions and 
parties that it is difficult to give the common essence of 
them all. The case is somewhat as in religion, where a 
great number of denominations, factions and groups ap- 
pear, and the interpretation of religion made by each is 
different from that made by any other. Hence, it is more 
illuminating than a definition to state that all branches of 
radicalism partake in some shade and degree of the main 
characteristics of radicalism which were drawn up at the 
beginning of this section. Some of the main branches and 
their main individual peculiarities will be listed below. 

1. State socialism looks toward state ownership and oper- 
ation of the main industries of the country by a political 
government which has eliminated the capitalist classes from 
power. The German experiments in state ownership and 
operation before the World "War were state capitalism 
rather than state socialism in the strict sense of the term. 
State capitalism is often considered by socialists as a step- 
ping-tone toward state socialism. It is state socialism 
which is dominant in the American Socialist Party. The 
Non-Partisan League of North Dakota exhibited the initial 
stages of state socialism, with state-owned grain elevators, 
state banks, and the like.^ 

1 Its leading oflRcera were recalled by vote of the state electorate 
in the fall of 1921. 



490 Economic Radicalism 

2. Guild socialism proposes a dual organization of pol- 
itics and industry, under which each branch of industry- 
would govern its own productive activity through the or- 
ganization of its workers, while co-ordination of the various 
branches of industry would be accomplished through the 
control of the democratic state. The workers would elect 
committees and councils to assume the leadership in pro- 
duction, and each branch of industry would thus put the 
control and operation of its own production in the hands 
of its workers. The state, representing more particularly 
consumers, would be a mediating and harmonizing agency, 
to effect proper adjustments between the several producers' 
organizations, and to protect the interests of society as a 
whole. The proposed Plumb plan for operation of the 
American railroads comes the nearest to the principles 
of Guild socialism of any project that is well known to 
this country, but the main stronghold of Guild socialism 
is among certain influential intellectual groups of Great 
Britain. 

3. Marxian Socialism refers to socialistic schemes based 
upon the doctrines of a German economist of the nine- 
teenth century, Karl Marx. The essence of Marx's social- 
istic principles was that the chief forces in the shaping of 
economic and social policies are economic and materialistic 
forces. Economic forces would in the long run be the 
undoing of capitalism itself, for concentration in industry 
would steadily grow greater and greater, and this would 
ever more sharply divide workers from capitalists. A class 
feeling would grow sharper and sharper, the greediness of 
the big capitalists would bring increasing misery to the 
workers, and the class war would eventuate. In the class 
war the workers would unite and strip the capitalist ex- 
ploiters of their property and decree that land and capital 
should be owned in common. 

4. Parliamentary socialism refers to socialism which 
aspires to gradual progress by securing the passage of re- 
form laws through parliaments, congresses, and legisla- 
tures. The Fabian socialists of England are the prominent 
representatives of this type of socialism, although almost 



Economic Radicalism 491 

every type of socialism contains some degree of parliamen- 
tary tactics. 

5. Syndicalism is a branch of socialism which exalts 
the organization of the producers in each line of industry 
as the supreme form of economic institution. Instead of 
using parliamentary tactics as a means to attaining power, 
syndicalists would use trade union tactics. Syndicalists 
believe in using trade unions as agencies of direct action 
by industrial methods. Direct action includes sabotage, 
i.e., spoiling machinery or product as a means of revenge 
upon employers; boycotts and labels; and most important 
of all, strikes. The day is looked forward to when the 
workers in one big union will declare the General Strike 
against the whole capitalist structure, and with the over- 
turn of capitalism will win control of all industry. The 
center of syndicalism is in French labor circles, but a 
group of American syndicalists have sprung up inde- 
pendently, under the title of the Industrial Workers of the 
World. Their strength as a direct organization dwindled 
greatly in America during and following the war, but men 
imbued with their doctrines penetrated the organizations 
of ordinary trade unions in a great many cases, although 
the extent of this penetration is practically impossible to 
estimate with any degree of accuracy. 

6. Communism is a form of socialism which pools the 
earnings and ownings of people, and divides the common 
fund on some such basis as, for example, to each according 
to his needs. 

7. The Soviet is the name given to the form of political 
machinery which has been established in the Russian 
socialistic experiment. The socialism which has been tried 
out in Russia has been a peculiar combination of some of 
the main principles of Karl Marx, of communism among 
peasants and workers, of opportunistic tactics to meet mil- 
itary and industrial crises, and of the dictatorship of a 
small minority of the proletariat over the bulk of the pop- 
ulation. Bolshevism is the creed of the political party 
which is in power, and has the same relation to the Soviet 
as the political party in power in a democratic state has 



492 Econoimc Radicalism 

to the general political organization of democracy. The 
effort to install communism proved incompatible with the 
human nature of the Russian peasants and workmen, and 
the leaders of the Bolshevist party have given up the 
attempt to establish communism as a part of their social- 
istic undertaking. They have returned to a mixture of 
government operation of some enterprises, of government 
control of others, of co-operative producers' societies, and 
of leasing of industries to individuals to be conducted as 
under capitalism by private initiative and ability. The 
Russian experiment has been marked by periods of violence 
and bloodshed which have outlawed it in the sympathies 
of the onlooking world, and its administrative inefficiencies 
and economic demoralization have alienated the public 
opinion of all democratic countries. 

Economic Analysis o£ Socialistic Proposals 

It should be realized that radicalism and socialism are 
problems that call for painstaking scientific analysis, rather 
than mere emotional excitement and impassioned vituper- 
ation. Large numbers of people are accustomed to dwell 
upon these particular problems with a great deal of mental 
heat, but very little mental light. Nothing is more common 
than for people who are too lazy to think to condemn all 
proposals for advance and improvement as radical, as if 
blindly placing that label upon a vaguely conceived project 
were the end of the whole matter. A study of economics 
ought above all things else to teach a person to discriminate 
between proposed changes on their merits, and to be im- 
mune from the capricious tendency of many people to 
brand every project as **red" which they do not feel 
inclined to think about. Vehement denunciation is not a 
substitute for intelligent analysis of radical proposals. 

The analysis of socialistic proposals may be divided into 
two main parts, institutional and psychological. One basic 
institutional difficulty in all socialistic proposals is the diffi- 
culty of preserving economic efficiency under the enormous 
administrative machinery of the socialistic organization. 
In previous pages attention was given to the question of 



Economic Radicalism 493 

the most efficient size of business combinations in various 
lines of industry and commerce. It was observed that in 
nearly all branches of economic activity there is a limit to 
the size of business unit which can attain maximum effi- 
ciency. This limit exists even in lines of industry where 
standardized mechanical processes predominate, but it is 
especially narrow in lines of industry where the human 
element predominates. Every increase in size beyond the 
point of maximum efficiency results in diminishing effi- 
ciency. The law of diminishing returns operates in spite 
of all that leaders of great genius can do, and after a cer- 
tain point of expansion is reached, the task of organizing 
the personnel of big enterprises, and of stimulating ade- 
quate incentives and motives to efficiency and exertion 
becomes too great. Socialistic proposals usually ignore 
this basic economic difficulty, which is established in the 
very nature of modern technical industry and modern 
administration of large groups of workers; and optimisti- 
cally take it for granted that the socialistic administration 
of industry, which would involve economic consolidation 
and concentration far beyond anything yet known in pri- 
vate business concentration, would be immune from the 
difficulties of overwhelming size. 

A second institutional difficulty under socialistic projects 
is the difficulty of economic discipline. Under almost every 
form of political administration yet experimented with, 
the spirit of the political agents has made political admin- 
istration a byword for indifference, slacking, and the desire 
to get something for nothing. No form of discipline has 
proved workable in political large scale organization which 
would secure the same attention to duty and performance 
of responsibility as is attainable under the moderate sized 
private business. The capacity to hold men to their tasks, 
to bend their energies effectively toward productive work, 
and to fasten their motives and instincts and thoughts 
adequately upon the handling of their jobs is exercised 
none too satisfactorily in the moderate sized private bus- 
iness, where the size of the business permits direct super- 
vision of labor and where the unyielding exactions of worfe 



494 Economic Radicalism 

done for pay received can be enforced. Referring partic- 
ularly to Guild socialism, but using words which apply 
equally to all socialistic programs, Alfred Marshall aptly 
writes, "In the present economic system, discipline is en- 
forced in great measure automatically 'by an unseen 
hand.' It is often rather harsh; and its severity calls for 
frequent mitigation of human effort. But if automatic 
discipline is removed, an all-pervading authority must be 
invoked to check abuse in small matters as well as in large. 
Unless Guild organization develops some notion, of which 
it at present seems to have made no forecast, it may prob- 
ably drift into chaos, from which relief can be found only 
in a military despotism."^ With the abandonment of the 
traditions, customs and habits which now attend upon the 
workers ' attitude toward dismissal, promotion, and efficiency, 
a new technique would have to be created, and a new 
habituation of labor psychology developed, and none of 
the writings of socialists up to date give anything like 
satisfactory assurance that the transformation of institu- 
tional discipline would avoid the chaos of which Marshall 
speaks. 

A third institutional difficulty in socialistic enterprise 
has to do with the problems of leadership. The history of 
politics indicates that the qualities of character which 
make a man popular with the mass of voters are not always 
the same qualities of character which make a man an effi- 
cient executive and administrator. The glad hand, genial- 
ity, the broad smile, spectacular achievement, pull with 
the political machine, and similar qualities play a great 
part in the popular election of mayors, legislators, gover- 
nors, and even of presidents. The expert, the technical 
specialist, the qualified executive, the trained administrator 
finds it next to impossible to compete in elections with the 
"man of the people." Private business has the virtue of 
bringing men of great executive ability into positions of 
responsibility and power, and there is no assurance that 
the socialist democracy of economic control and operation 
would secure the same qualifications in leadership. Human 
1 "Industry and Trade," p. 600. 



Economic Radicalism 495 

nature in polities is not sucli as to make one hopeful of 
the economic leadership of the socialistic order/ 

A fourth institutional difficulty concerns itself with the 
apathy of the average man. In their enthusiasm the 
socialists assume that the average man is on his tiptoes, 
straining at the leash, ready to plunge into the responsi- 
bilities of socialistic economic democracy. They picture 
the common worker as a human being who will spring into 
activity as soon as socialistic democracy is declared, and 
who will be on duty at all times, alert and eager, taking 
a man's part in the conduct of economic affairs. But the 
average worker is an indifferent individual, and it is exceed- 
ingly difficult to maintain for any length of time his aroused 
interest in political and economic problems. Interest and 
action require exertion of mind and body, and the ordinary 
individual, after the first snatch of novelty is past, falls 
into an easy-going inertia. The direct primary has been 
a disappointment to most of its sponsors because voters 
proved too indifferent to bother going to the polls to use 
it. The ordinary town caucus is attended by only a hand- 
ful of men, and delegates to a nominating convention enjoy 
the trip and are proud of the experience, but are relieved 
to have the pain of thinking out a compromise candidate 
left to a handful of inside politicians. Votes on vital eco- 
nomic questions under the socialistic plan would surely be 
cast by an active minority ; elections of leaders would bring 
tedium and boredom ; attendance at meetings would become 
a routine aggravation ; and the tactics of controlling polit- 
ical interests in the economic commonwealth would perme- 
ate the system. The present intellectual equipment and 
training of millions of workers, their lack of experience 
in responsible economic citizenship, their unsteady interest 
in vital economic and political issues make a dubious pros- 
pect of the economic society of socialism. The load of 
intelligent responsibility which socialistic programs en- 
trust to the masses of workers is a bad institutional ar- 
rangement, 

1 See Graham Wallas, "Human Nature in Politics." 



496 Economic Radicalism 

The paramount psychological difficulty of the socialistic 
commonwealth is one of incentives and motives. The mo- 
tives which could be counted upon in the average worker 
are in doubt. Socialists contend that the feeling of being 
a part of the co-operative commonwealth would stimulate 
loyalty and workmanship, and that by placing the premium 
upon social unity rather than individual aggrandizement, 
the selfish private motives of capitalism would drop out 
of use, and public-spiritedness would be realized. Such 
an analysis of human nature cannot be looked upon as 
other than a convenient rationalization inspired by the 
hopes and dreams of the analyst. It is the conclusion of 
buoyant optimism rather than that of careful observation 
of human psychology. The making over of motives and 
the changing of forms of instinct expression is a gradual 
process at the best, and involves the slow accumulation of 
folk-ways, customs, traditions, habits and institutions. The 
usual socialist doctrine takes the quick adoption of new 
motives and incentives for granted, but this is the very 
difficulty which lies at the heart of the socialist issue. The 
motives of men of rare ability, of the potential leaders of 
the economic order come under the same consideration as 
the motives of the rank and file. The gradual accommoda- 
tion of leaders under the capitalist system to the social 
requirements of the last decade or two has taken the form 
of some degree of adoption of service motives and of public- 
mindedness, but there is scant evidence for the hope that 
the sweeping abolition of motives of private acquisition 
would result in the facile installation of motives of public 
achievement and public service. 

The easy optimism of socialistic psychology is quickly 
apparent in the following utterance by Bertrand Russell: 
"The world that we must seek is a world in which the 
creative spirit is alive, in which life is an adventure full 
of joy and hope, based rather upon the impulse to con- 
struct than upon the desire to retain what we possess or 
to seize what is possessed by others. It must be a world 
in which affection has free play, in which love is purged 
of the instinct for domination, in which cruelty and envy 



Economic Radicalism 497 

have been dispelled by happiness and the unfettered devel- 
opment of all the instincts that build up life and fill it 
with mental delights. Such a world is possible; it waits 
only for men to wish to create it. ' '^ 

The socialistic institutions that are proposed place such 
a heavy burden of responsibility upon the human nature 
of the average man as grossly to overstrain his mental 
capacities. The account of inequalities of intelligence and 
of all instinctive equipment, which was given in previous 
pages, indicates the incapacity of the average man for 
the heavy responsibilities of the socialistic state. The 
further assumption that the bulk of men will want to 
shoulder their responsibilities, that they will be purged of 
pernicious instinctive tendencies and filled with idealistic 
and creative tendencies overrates human nature. Just as 
many classes of reform underrate the strain that can be put 
upon human nature, so socialistic projects overrate the 
strain that human nature will bear. It may be that some 
form of economic democracy can be developed which will 
adapt the institutions of industry to the strain which 
human nature will bear efficiently. Such an adaptation 
of men to institutions and of institutions to men is the 
guiding principle of economic democracy and an analysis 
of the principle will be undertaken in the final chapter of 
this volume. 

In this whole analysis of socialistic proposals it would 
be blind prejudice to deny that a goodly number of bril- 
liant minds are to be found among the leaders of radical 
thought. Some people who are not anxious to be strictly 
honest in their thinking sweep aside all radical thinkers 
as being in the category of intellectual inferiority. But 
no matter how much one may disagree with the conclusions 
of thinkers of opposite opinions, nothing is gained by mak- 
ing light of their incisive comments on the workings of 
the industrial order or of their painstaking research and 
investigation. Brilliance of intellect is not missing in 
the radical groups. As a matter of fact, difference of opin- 
ion becomes sharp only when there is some degree of bril- 
1 Bertrand Russell, "Proposed Roads to Freedom," p. 212. 



498 Economic Radicalism 

liant observation and inference on both sides. Socialism 
would not bave aroused such bitter and desperate denun- 
ciation had not a number of its generalizations disclosed 
vulnerable sore spots in the existing industrial order. 
Those people who want most to smite socialism usually do 
the least, for the simple reason that their emotional reac- 
tions are so strong that they lose the power to have respect 
for integrity of mind and incisive comment wherever they 
may be found. Vehement opposition is not, as a rule, intel- 
ligent opposition. To give due regard to the mental power 
of socialistic thinkers is not to take the stand that we must 
admit they are right just because they may be mentally 
brilliant. The whole force of these remarks is fhat effective 
analysis of radical programs must always endeavor to 
estimate the weight of an idea at its actual value. 



CHAPTER XIII 

ECONOMIC DEMOCRACY 

Economic democracy is a comprehensive term and varied 
definitions are given to it from time to time. The two 
most common versions of the term refer to democratic 
control over industry exercised through the medium of the 
political government, and to democratic control exercised 
through the medium of some special form of organization 
within industry itself. 

The first version of economic democracy would make the 
term cover practically all of the matters which have been 
already discussed under the section on Public Control. 
The American Government is a democracy, and when dem- 
ocratic government controls and regulates economic affairs, 
the process is certainly in the nature of economic democ- 
racy. This form of economic democracy would include 
government ownership and operation of industries, and 
would, for instance, include the Post Office or the Panama 
Canal as typical illustrations of economic democracy. Cer- 
tain observers are disposed to term such instances of 
government authority as state socialism, whereas others 
are disposed to term them state capitalism. 

The dispute over terms is non-essential. The inclusion 
of public control or of government ownership and opera- 
tion under economic democracy may be allowed as legit- 
imate. It is not intended to analyze this form of economic 
democracy at this point, for the simple reason that most 
of what has been said under Public Control and under 
Radicalism applies to economic democracy of this type. 
The mechanism of public control provides for a moderate 
assertion of democratic power through the agencies of the 
State, and the same mechanism expanded provides for the 
assertion of democratic power which establishes state own- 

499 



500 Economic Democracy 

ership and operation. Moreover, althougli the form of 
democracy under a capitalistic state and a socialistic state 
would differ profoundly; nevertheless, in either case, state 
ownership and operation of industry is subject to the same 
institutional and psychological difficulties as were discussed 
under Radicalism. Consequently, the discussion contained 
in the foregoing sections on Economic Adaptation have a 
direct bearing on the problems of economic democracy 
attained through the framework of political democracy. 

The discussion of this section has to do primarily with 
the second form of economic democracy, namely, that at- 
tained through the direct organization of industry itself 
on a democratic principle. Democracy is a loosely used 
watch word to cover a host of economic programs, and it 
is the general impression that as soon as a program of 
action has been labelled "Democracy," its success is pre- 
destined. Not a few economic thinkers voice the opinion 
that political democracy is already won in most modern 
countries and that economic democracy is the next great 
human step forward. Assuming that political democracy 
is practically an unqualified success, they assume that to 
inaugurate the same structure of government for industry 
will assure similar happy results in that department of 
modern life. Such an attitude is uncritically optimistic. 
It trusts credulously in some obscure magic of ** Democ- 
racy" to set industry at rights, and -grossly overrates the 
power of a form of organization to escape from or to over- 
come the grave defects of human nature in the people who 
live within the organization and through whom it func- 
tions. As a preparation, therefore, for a careful and crit- 
ical analysis of economic democracy, it is desirable to have 
a correct view of the present status of political democracy. 
Probably the best account for this purpose is that given 
by James Bryce in his work on Modern Democracies. 
The general scope and portent of his conclusions are ad- 
mirably summarized in the following quotation: "I may 
here . . . sum up in a few propositions certain broad con- 
clusions which may be drawn from a review of modem 
popular governments. They are stated subject to certain 



Economic Democracy 501 

exceptions, already mentioned, in the ease of particular 
countries. . . . 

' ' Democracy has belied the prophesies both of its friends 
and of its enemies. It has failed to give some benefits 
which the former expected, it has escaped some of the evils 
which the latter feared. If the optimistic overvalued its 
moral influence, the pessimists undervalued its practical 
aptitudes. It has reproduced most of the evils which have 
belonged to other forms of government, though in different 
forms, and the few it has added are less serious than 
those evils of the older governments which it has escaped. 

"I. It has maintained public order while securing the 
liberty of the individual citizen. 

"II. It has given a civil administration as efficient as 
other forms of government have provided. 

"III. Its legislation has been more generally directed 
to the welfare of the poorer classes than has been that of 
other governments. 

' ' IV. It has not been inconstant or ungrateful. 

"V. It has not weakened patriotism or courage. 

'*VI. It has been often wasteful and usually extravagant. 

"VII. It has not produced general contentment in 
each nation. 

"VIII. It has done little to improve international rela- 
tions and insure peace, has not diminshed class selfishness 
(witness Australia and New Zealand), has not fostered 
a cosmopolitan humanitarianism nor mitigated the dislike 
of men of a different color. 

"IX. It has not extinguished corruption and the malign 
influences wealth can exert upon government. 

"X. It has not removed the fear of revolutions. 

"XI. It has not enlisted in the service of the State a 
sufficient number of the most honest and capable citizens. 

"XII. Nevertheless it has, taken all in all, given better 
practical results than either the Rule of One Man or the 
Rule of a Class, for it has at least extinguished many of 
the evils by which they were defaced. ... 

"In 1914 there were signs of decline in some countries 
where decline was hardly to have been expected, and of 



502 Economic Democracy/ 

improvement in other countries, but nothing to indicate 
in any country either a wish to abandon democracy or the 
slightest prospect that anything would be gained thereby. 
Disappointment is expressed, complaints are made, but 
no permanent substitute has been suggested, . . . Within 
the century and a half of its existence in the modern world 
free government has passed through many phases, and seems 
now to stand like the traveller who, on the verge of a 
great forest, sees many paths diverging into its recesses 
and knows not whither one or other will lead him. ' '^ 

The two most important forms of economic democracy 
which command deep interest at the present time are works 
councils and labor unions. The works councils are organ- 
izations of workers which are formed, usually, at the 
initiative of employers and in which powers are granted 
to laborers by the voluntary action of employers. Labor 
unions, on the other hand_, are organizations of workers 
which are formed at the initiative of workers themselves 
and in which powers are won usually as grudging conces- 
sions from employers. 

Works Councils 

The essential structure of the dominant types of works 
council is fairly simple. The workers in a plant elect 
representatives who confer with representatives of the 
management. Nominating and balloting procedure takes 
place in much the same way as in a political organization. 
The representatives who are elected organize as a body, 
with a chairman and other officers, and establish the nec- 
essary committees and subcommittees to deal with special 
problems. The workers' representatives constitute the 
works council or shop committee and meet the representa- 
tives of the management in joint conference for the dis- 
cussion of industrial problems for the adjustment of griev- 
ances, and for general collective bargaining. 

These works councils confine their attention to those 
phases of industrial problems which directly affect the 
welfare of labor. Such problems include, for the general 

iBryce, "Modern Democracies," Vol. II, pp. 562-563, 597-598. 



Economic Democracy 503 

run of plants, hours of labor, wage scales, methods of pay- 
ment and piece rates. A large proportion, but not all, 
works councils deal with social and recreational activities, 
mutual benefit, charity and relief, welfare work, housing, 
co-operative stores, medical care, insurance, education, 
Americanization, rest rooms, lunch rooms, prizes, work- 
ing conditions, accident prevention, factory sanitation, and 
hygiene of the workers. A smaller proportion of the works 
councils deal with shop discipline, review of . discharge, 
promotion, hiring, and transfer. Only a few councils deal 
with the technical improvement of production or with the 
problems of production management. None are allowed 
to concern themselves with those phases of management 
centering around finance, capitalization, or matters which 
are not directly of importance in the life of the worker. 

The power and authority of works councils vary from 
company to company. In some cases, if workers and man- 
agement fail to agree on an issue, it is referred to arbitra- 
tion, but in most cases it is referred to high officials of 
the company or to the board of directors. Representatives 
of both workers and management vote on questions and in 
the overwhelming bulk of cases it is assumed, as a matter 
of course, that the voting power is equal. This assumption 
gives rise to the theory that works councils give workers a 
share in the management. In all ordinary events, the 
workers do participate in the management of the affairs 
which affect them. It should not, however, be overlooked 
that with most plans, in the last analysis the company has 
ultimate authority in its own hands. Boards of directors 
do not surrender their ultimate authority in the event of 
a showdown, but in the everyday administration of works 
councils, a spirit of give and take and of sharing in man- 
agement is maintained, and the ultimate location of author- 
ity is ignored as much as possible. In fact the success of 
collective dealing through works councils depends upon 
the thoroughness with which all questions as to the relative 
power of the two parties, labor and management, can be 
relegated to the background. Collective bargaining through 
works councils succeeds only in so far as fairness is sub- 



504 Economic Democracy 

stituted for force in industrial relations. If the manage- 
ment convinces labor at the outset that every principle 
and every detail of the council plan are treated on the part 
of the company with perfect justice, candor and honesty, 
the plan is in a fair way toward success. But if the man- 
agement hedges, misrepresents, or threatens, the plan is 
almost sure to collapse.^ 

Obviously, therefore, the installation of the machinery 
of industrial democracy merely creates an opportunity for 
the spirit of the management to evoke a favorable response 
from labor. The mechanism of organization itself does not 
insure at all that industrial democracy will be attained. 
The importance of a good plan of industrial democracy 
does not consist in any power of the plan as a plan to secure 
industrial democracy; the importance of the plan consists 
merely in the fact that it provides a channel for the spirit 
of management to call out the spirit of labor. Of course, 
it is equally necessary that the spirit of labor shall be 
honest and fair, and that labor shall genuinely respond to 
the responsibilities and powers conferred upon it by the 
works council plan. But in most plans of this sort the 
dynamic genius and inspiration behind the plans comes 
from management, and unless management firmly takes the 
initiative in establishing a basis of confidence and fairness 
the plan will fail. For instance, the International Har- 
vester Company has works councils in twenty-four of its 
plants, and the success of the councils varies considerably 
over these plants. The degree of success varies, it is found, 
in direct ratio to the efficiency and spirit of the local man- 
agement at each plant in applying the system to that par- 
ticular plant. Moreover, it is necessary to have not merely 
the local superintendents and executives imbued with the 
proper attitude and understanding, but also the bosses, 
sub-bosses and foremen. To this end, many companies have 
established training schools for bosses and foremen, to ac- 
quaint them with the purpose of the works council plan, 
with its technique and with the new spirit which it is 

1 See address by L. W. Wallace, President of Society of Industrial 
Engineers, Proceedings of 1919. 



Economic Democracy 505 

necessary for them to evince if the plan is to be a success. 
Finally, workers themselves have to be educated to under- 
stand the significance of the democratic policy, and have to 
receive correct and adequate information about the affairs 
of the company to allay suspicion and establish confidence. 
Industrial democracy involves a technical organization, but 
it also involves, — and this is imperative, — a basic spirit of 
fairness and justice on the part of both labor and capital. 

Labor Unions 

The structure of labor unions has many variations. 
Numerous structural types of unionism have developed, 
and an observation of these types is the most useful means 
of studying labor union structure. The bulk of labor 
unions in the United States are of the "craft type," i.e., 
they are organized on the basis of the occupation or craft 
of the v7orkers. For each distinct type of occupation there 
is a distinct trade union organization. These craft unions 
become federated in local, city, state and national federa- 
tions. The federal groupings aim to effect a certain degree 
of concerted thought and policy, but in fundamental poli- 
cies and powers each constituent craft national retains 
its individual sovereignty and right of self-determination. 
A different and growing type of labor union is organized on 
the basis of a given industry. The coal miners' unions are 
the most impressive illustrations of industrial unions, and 
include in their scope men of all crafts, occupations and 
trades, and men of all degrees of skill or lack of skill. A 
minor type of unionism organizes all the workers of a 
single geographical division, regardless of crafts or indus- 
tries, into a single labor union. The craft, federation, in- 
dustrial, and geographical bases of union organization give 
rise therefore to the main structural types of labor organi- 
zation in American industry. 

These structural types provide in various ways for the 
election of leaders by a popular vote among the members. 
Local units send delegates to city or district or national or 
international units. The methods of balloting, the powers 
of members and of leaders, the administrative mechanism, 



506 Economic Democracy 

all show immense variations from industry to industry. 
The essence of the democratic structure of all types and 
forms is that the rank and file of unionists have the power 
to elect officers and thereby to express their opinions on the 
policies and methods of labor organization. Until recent 
years the local units of union organization were the domi- 
nant factors in the labor unions of this country, and they 
jealously safeguarded their local rights of self-determina- 
tion in regard to fundamental policies. Recent years have 
witnessed a powerful movement toward centralization of 
union authority and influence in the hands of the national 
organizations. The weakness of labor in local collective 
bargaining and its strength in national collective bargain- 
ing, and the advantages of nationally administered bene- 
ficiary and strike funds have given this centralizing move- 
ment a steady impetus. The locals have found it necessary 
to preserve and augment their industrial power by a policy 
of uniting on a national scale. Conspicuous forms of con- 
trol now commonly exercised by national over constituent 
local organizations are found in the "national regulation 
of admission requirements, the national control of strikes, 
and the adoption of national working rules. "^ The center 
of the brains of the labor union movement and of the real 
power of leadership exists among the leaders of the na- 
tional organizations, and the federations of national 
organizations. 

The source of labor union success is not the type of struc- 
ture which allows a mass labor election, but is rather the 
aggressive spirit of the leaders themselves. Labor unionism 
is still in a militant stage and the militant type of leader 
tends to come to the front to cope with the challenge. 
Leaders feel it necessary to be domineering often, to 
manipulate the rank and file, to ride rough-shod over mass 
suggestions which obstruct efficiency, and to take action 
and get results, meantime bringing the rank and file along 
as best they can. Labor unions can get nowhere in the 
present industrial struggle by debating society tactics and 

1 G. E. Barnett, Quarterly Journal of Econotnics, XXVII, pp, 

m-m, --■-'■■-■ ^ - ■ - ■ 



Economic Democracy 507 

by constant referendums to find out the will of members. 
As often as not, members have no will, and even when they 
do have, it is likely to be misinformed, shortsighted or 
suicidal. This does not mean that leaders are irrespon- 
sible individuals, and contemptuous of the rank and file; 
but it does mean that they face the imperative need for 
efficiency in dealing with employers and that the condi- 
tions of efficiency are a concentration of power and initia- 
tive in the hands of leaders and a willingness on the part 
of the rank and file to support their leaders as long as their 
policies get results in terms of better wages, hours and 
working conditions. Hence, labor union organization is 
democratic in the sense that a great deal of dictatorial 
authority rests Mdth officers and leaders in the determina- 
tion of immediate strategy, and that this authority is sub- 
ject to the ultimate satisfaction of the rank and file. If the 
dictatorial and aggressive methods of one leader fail to get 
results, a new leader will be chosen and will be commis- 
sioned to use his large powers to win the desired results. 
Successful unionism therefore rests upon successful leader- 
ship and successful leadership rests upon results in terms 
of gains to the workers, attained by the aggressive genius 
of union officials.^ 

In addition to the structural types of unionism, there are 
certain types which are classified on the basis of the func- 
tions which they perform, and of the purposes and methods 
of their activity.^ The dominant type, classified on this 
basis, is husiness unionism, so named because the unionists 
look upon their activities from a business point of view. 
They devote their energies to practical material gains, ordi- 
narily through the use of collective bargaining. Their ob- 
jective is "more, more, more, now." To raise wages, 
shorten hours, and improve working conditions are tan- 
gible, direct, positive objectives, and the union organiza- 
tions of this type conceive the function of unionism to be 
to attain these objectives in a practical, business-like way. 

1 R. F. Hoxie, "Trade Unionism in the United States," Chapter 
VII. 

2IUd., Chapters II-III. 



508 Economic Defaocracy 

A second type is friendly or uplift unionism, — a type 
which inclines to be idealistic, philosophical and co-opera- 
tive. It, too, uses collective bargaining, but mainly for such 
benevolent purposes as mutual insurance, profit sharing, 
friendly benefits, welfare work and social and humani- 
tarian improvement. Most employers who profess to be- 
lieve in the right of laborers to organize into unions have 
in mind a unionism of this friendly or uplift type. People 
who believe in labor unions "as such" contemplate welfare 
unions whose efforts are directed toward a co-operative 
humanitarianism rather than toward a militant demand 
for practical, business-like gains for labor. 

Radical unionism is a third type, and as the name sug- 
gests, applies to unions professing socialistic or revolu- 
tionary purposes. The most aggressive unions of this type 
have been those associated with the Industrial Workers of 
the World. The I. W. W. was conspicuous before the war, 
but many of the leaders of the movement were vigorously- 
suppressed or were deported during the war period, and 
the formal organization of the I. W. W. was greatly weak- 
ened. Their ideas, however, were carried over in not a few 
cases to unions of the business type, or of the predatory- 
type, by agitators or leaders who sought to spread their 
philosophy of unionism by "boring from within." It 
seems certain that the extent of this kind of penetration of 
old unions with I. W. W. ideas is considerably exaggerated 
in the popular mind. 

A form of radical unionism which has more far-reaching 
significance is contained in such union organizations as the 
United Mine Workers of America, the Railroad Brother- 
hoods, and the Amalgamated Garment Workers of Amer- 
ica. The United Mine Workers are pressing for the 
nationalization of the mines along a quasi-socialistic direc- 
tion and the Railroad Brotherhoods, by urging the adop- 
tion of the Plumb Plan for railroad operation, committed 
their union organizations to a policy which was essentially 
in the nature of guild socialism. The purposes of the 
Amalgamated Garment Workers may be set forth in the 
following quotation: **An analysis of the strategy of th© 



^Economic Democracy/ 509 

new unionism will discover in it two fundamental objec- 
tives to which all other policies are subordinated. The 
first is to organize all the workers in the industry ; the 
second is to develop them, through their daily struggles, 
into a class-conscious labor army, able and ready to assume 
control of industry. . . . Their whole tendency is in the 
direction of training the workers for assuming control of 
production, and of accepting the social and economic re- 
sponsibility which such control involves."^ To this end, 
the garment unions look forward to the abolition of the 
capit-alistic system. Radical unionism has increased in 
strength in recent years, and particularly so in such basic 
industries as coal, transportation and clothing. 

A fourth type has been designated predatory unionism. 
The most recent exposure of predatory unionism has been 
in the building trades of large cities. In New York City, 
a notorious labor leader by the name of Brindell exercised 
dictatorial and unscrupulous powers for the sake of exact- 
ing fees, bribes and blackmail from both laborers and em- 
ployers. Such unions hold up all parties to industry by 
fair means or foul whenever they see an opportunity to 
reap a selfish gain. In its extreme forms, predatory 
unionism adopts guerilla tactics, and by ruthless, secret, 
violent strategy strives to exact the last pound of flesh 
which the industrial body will bear. 

The great bulk of labor unionism seeks its ends by means 
of collective bargaining. The nature of collective bargain- 
ing differs greatly between the ordinary works council and 
the bulk of labor unions in that the former depends for 
success upon the voluntary good will of the employer and 
the spirit of co-operation between labor and capital, 
whereas the latter depends upon the power of the labor 
union to win recognition from the employer and upon the 
relative bargaining might of labor and capital. Most of 
the success of works councils comes from the fact that 
employers co-operate with the councils wholeheartedly ; and 
most of the abuses and excesses of labor unions come from 
the fact that employers dislike to co-operate with labor 

iBudish and Soule, "The New Unionism," pp. 12, 194-195, 204. 



510 Economic Democracy 

unions, and usually consent to deal with them only when 
forced to do so. Works councils perform their responsi- 
bilities in an atmosphere of friendly co-operation; labor 
unions perform their responsibilities in an atmosphere of 
hostility, suspicion, and threats. 

The consequence is that labor unions are characterized 
by widespread policies and deeds which are highly objec- 
tionable from the standpoint of the best interests not merely 
of employers and the public, but of laborers themselves. 
The objectionable tactics of organized labor arise largely 
from the fact that labor unions have to fight every inch of 
the way for industrial control and have to fight then for 
self-preservation to perpetuate what has been won. Labor 
resorts to the closed shop in response to basic human in- 
stincts demanding self-protection, because the open shop 
has so often meant in actual practice a free opportunity 
for employers to discriminate against union members and 
to cripple union organization. Union rules and regulations 
which restrict production seem aimed oftdn to secure the 
maximum of pay for the minimum of work, and in this 
respect they reciprocate the endeavor of any number of 
employers to secure the maximum of work from labor for 
the minimum of pay. If one were to draw up a list of the 
faults, vices and abuses of the bulk of labor unions and 
were to trace the causes of each item on the list, he would 
find them largely in the unhealthy spirit of distrust and 
antagonism which is widespread in American industry. 
The penetrating observations of Felix Frankfurter, from 
experience on President "Wilson's Mediation Commission 
and as chairman of the National War Labor Policies Board, 
are of sound practical value : ' ' The unions must still fight 
for their life instead of being a recognized social instru- 
ment tested by their contributions to the community as a 
whole. Not until they are generously and frankly recog- 
nized as having a rightful place in our national life will 
the leaders of labor have time and energy to give to the 
solution of the difficult social and industrial problems with 
which organized labor should concern itself. ... If the 
fighting spirit imposed by capital upon labor were with- 



Economic De7nocracy 511 

drawn, then we could proceed to the question which this 
conference raises, namely: How shall we release the ener- 
gies of the masses of the people who are workers so that 
our civilization shall not only remove the sores and injus- 
tices which infest it but shall be something fit and ade- 
quate for democracy ? ' ' 

The deepest difficulties in insuring that labor unions are 
made over into safe and trustworthy instruments of indus- 
trial democracy are psychological difficulties. The power- 
ful instincts in employers of self-assertion, domination and 
freedom of action are thwarted by the demands of labor 
unions for group self-assertion in deciding industrial 
issues. Habits, traditions and customs have constituted a 
steady psychological influence on the business man to make 
him feel that there is one and only one way to manage 
business efficiently and that is to run it as he pleases, free 
from outside restraint ; labor unions challenge this accumu- 
lation of precepts and habits in business, and it is inev- 
itable and natural for the business man to resist the 
upheaval of those business principles which he has come to 
believe are axiomatic. But the greatest psychological force 
in shaping the attitude of the business man toward labor 
unions is fear. The business man has a right to fear that 
if he concedes an inch to labor unions they will take a mile. 
He has no assurance that if he attempts to co-operate with 
labor in a constructive way he may not find himself soon 
at the mercy of predatory unionism. It is this universal 
fear that labor unions will cling to their abuses and faults 
if employers do freely and frankly admit them to a share 
of industrial control which primarily accounts for the 
fighting attitude of hostility and resistance to the tactics 
of labor unions. These psychological obstacles to the ad- 
vance of unionism are at the heart of the problem. As a 
matter of fact, it would doubtless be disastrous for em- 
ployers generally to turn over full powers to labor unions 
suddenly. What would happen, however, if employers 
approached unions in the same manner as the more pro- 
gressive of them have approached works councils is not so 
disheartening a conjecture. The method of approach in 



512 Economic Demnocracy 

that case is a deliberate and painstaking effort by the em- 
ployer to establish frank co-operation, to give honest infor- 
mation about the financial affairs of the company, to 
educate foremen, bosses and superintendents to perform 
intelligently their parts under the works council system, 
and to create mutual confidence by every word and every 
move. The contrast between the method of approach to 
works councils and to labor unions is extreme, and the 
success of the constructive and co-operative method in 
keeping works councils reasonably free from the abuses 
frequent in labor unions is a ground for the hope that the 
same constructive and co-operative method applied to 
labor unions would go far toward removing those abuses 
as they now exist in unionism, 

William Howard Taft, joint chairman during the war of 
the National War Labor Board and since appointed Chief 
Justice of the United States Supreme Court, has summar- 
ized the situation in words which express both sound public 
policy and sound economic principles: "Organization of 
labor has become a recognized institution in all the civilized 
countries of the world. It has come to stay; it is full of 
"usefulness and is necessary to the laborer. It shows serious 
defects at times and in some unions. . . . These are evils 
that as the unions grow in wise and intelligent leadership 
we may well hope are being well minimized. , . . Whether 
we will or not, the group system is here to stay, and every 
man interested in public affairs must recognize that it has 
to be dealt with as a condition, to be favored in such a way 
as to minimize its abuses and to increase its utility."^ 

The foregoing account of the institutional and psycho- 
logical relations between employers and employees would be 
incomplete at a most important point if the responsibility 
of labor unions, especially of their leaders, in the circum- 
stances were not pointed out. The militant attitude of 
labor union leaders may be quite natural under the pre- 
vailing conditions, but there will certainly be no escape 
from industrial antagonism until unionism accepts a more 
constructive attitude toward problems of production. 

ID. Bloomfield, "Problems of Labor," pp. 212-214. 



Economic Democracy 513 

Unionism inherits a tradition of aggressiveness and mili- 
tancy and the tradition is extremely tenacious; but unless 
the tradition can be altered sufficiently to make a place in 
trade union principles for a recognition of the basic eco- 
nomic fact that labor organizations can safely be trusted 
with power only when they evinee a willingness and a 
capacity to promote, encourage and organize greater pro- 
ductive efficiency, then labor can scarcely hope for business ^ 
recognition or public support. The reconstruction of 
labor union organization and strategy on principles condu- 
cive to labor efficiency and to maximum production is a 
sine qua non of evolving sound industrial democracy from 
present trade union structure. 

In large measure, such a reconstruction of unionism can 
come only as an act of will on the part of unionists, espe- 
cially of their leaders. They must make up their minds 
and exercise their powers of volition before an adequate 
reconstruction can occur. But the psychological process 
can scarcely be hoped for if it is to come merely as an act 
of will. The irrational and blindly instinctive forces which 
tend to stifle such a deliberate change of mental outlook 
are enormous, and, it must be admitted, they are likely to 
prevail under the present state of affairs. Only rarely can 
men, especially masses of men, rise above their institutional 
surroundings and deliberately resolve upon a new spirit 
and a new attitude toward their responsibilities. The level 
of the behavior of the crowd cannot rise much above the 
level of its institutional environment. Industrial institu- 
tions which invoke pernicious human tendencies and which 
stimulate dangerous expressions of the primary human in- 
stincts cannot be counteracted by the mere logical or ra- 
tional powers of the crowd mind. On the other hand, 
institutional arrangements which help men to a co-opera- 
tive attitude, to self-control, to constructive effort have the 
most salutary influences upon the beliefs which they put 
into action. Hence to invent by gradual experiment and 
by intelligent trial and error the type of industrial insti- 
tutions best fitted to help the better and hinder the more 
pernicious expressions of the great human instinctive 



514 Economic Democracy 

energies, is a paramount task for all those who desire to 
share in hastening the progress of industrial democracy.^ 

A crucial point in industrial institutions is the issue of 
the proper basis of collective bargaining. The great slogan 
of labor is that "labor is entitled to collective bargaining 
through representatives of its own choice." The objection 
raised by employers is that such a principle enables labor 
to be represented by leaders of the national union who are 
not employees of the particular plant where they are rep- 
resenting labor in collective bargaining. Employers have 
favored the works council because in every case the repre- 
sentatives of the workers at any single plant are themselves 
workers at that plant. Being employed at the plant, the 
works council representatives presumably know from direct 
experience something about the problems involved in pro- 
duction and in labor administration, and have a strong 
spirit of responsibility to their immediate constituents with 
whom they mingle constantly in the day's work. If an 
employer accepts the labor union principle of collective 
bargaining, he is likely to have to deal, not with a workman 
in his own plant, but with a leader from a national union's 
headquarters. From the employers' standpoint this union 
representative is an outsider and a meddler, and knows 
little or nothing of the particular problems of an individual 
plant. To have an outsider interfering in the management 
of his business impresses the employer as an absurd dicta- 
tion by an outsider as to how he shall run his business. 
Hence, the progressive employer accepts the general prin- 
ciple of collective bargaining through representatives of 
labor's own choice, with the proviso that those representa- 
tives shall be persons actually working in the plant which 
they presume to represent. 

From the labor unions' viewpoint, this policy of em- 
ployers is looked upon as a subterfuge. No one dictates to 
the employer that his agent in collective bargaining shall 
be actually employed in the plant. If the corporation is a 
large one, comprising a dozen or a score or more of plants, 
t-Jie company centralizes its part in collective bargaining in 
iSee James Bryce, "Modern Democracies," Vol, I, p. 10, 



Economic Democracy 515 

the hands of some executive at the main office, who of 
course cannot be employed in each one of the separate 
plants of the company. Labor reasons that it should pos- 
sess a similar prerogative of centralizing its part in collec- 
tive bargaining. Moreover, labor finds that it is no light 
task to match labor's brains against the best brains that 
management can produce. Suppose, argues labor, two men 
in ordinary life have a dispute and bring their case into a 
court. Suppose one man hires a brilliant lawyer, a man 
of great talent and ability, and the other man hires only a 
mediocre lawyer, a man of slight talent and weak ability. 
The chances are all in favor of a decision for the man who 
is ably represented. So in industrial relations, manage- 
ment is represented by brilliant men, by the best experts 
that management can procure; labor, in order to be repre- 
sented on equal terms, must have expert bargainers, men 
experienced in all the strategy of bargaining, the best 
brains that labor can procure. The detached individual 
plant is likely not to have any workman on the job who is 
fully equal mentally to the task; hence there is need of a 
man trained and practiced in the art of bargaining, a man 
direct from national union headquarters. 

In President Wilson's first industrial conference, ap- 
pointed to deal with the problems of post-war industrial 
reconstruction, the committee was composed of prominent 
authorities representing labor, capital and the public. The 
attention of all groups was riveted to this problem of 
whether or not labor is entitled to representatives of its 
own choice in collective bargaining. In the final vote, the 
public group and the labor group voted in favor of the 
unqualified right of labor to representatives of its own 
choice.^ A minority of the capital group voted with labor 
and the public, but inasmuch as the system of voting in 
force at the conference provided that the adoption of any 

1 The full text of the resolution is as follows : "The right of wage 
earners to organize without discrimination, to bargain collectively, 
to be represented by representatives of their own choosing in nego- 
tiations and adjustments with employers in respect to wages, hours 
of labor, and relations and conditions of employment is recognized," 



516 Economic Democracy 

measure required a majority vote in each of the three 
groups, the resolution was lost. Thereupon the conference 
broke up. 

In a discussion of the broader principles of industrial 
democracy, it is important to consider the question of the 
relation in practice between works councils and labor 
unions. Are the two supplementary, or do works councils 
tend to eliminate labor unions entirely? The consensus of 
opinion among employers using works councils is to the 
effect that they have nothing against the union and are not 
aiming to destroy it or eliminate it. They are willing that 
labor unions should exist, and will allow workers who are 
union members to sit on the works councils as representa- 
tives of the workers of the plant. They contend that there 
is no valid reason why the union should not supplement 
the works council. With rare exceptions, they decline to 
enter into collective bargaining with the union, or to give 
it official recognition, claiming that one collective bargain- 
ing agency is enough and that this is supplied through the 
works council. Hence, the real meaning of the assertion by 
employers that they believe in a union supplementing the 
works council is that they believe in that particular type of 
union which is classified as friendly or uplift unionism. 
The welfare, humanitarian and social features of such a 
unionism may, in the judgment of employers, supplement 
the efforts of the works council. Theoretically, this divi- 
sion of supplementary functions appears sound and plau- 
sible. It should be carefully noted, however, that the works 
councils themselves undertake such a comprehensive pro- 
gram that when they get through there is little left for 
supplementing. The works councils undertake welfare 
work, humanitarian measures, social features, and virtually 
all forms of friendly and uplift activity. Moreover, the 
works councils do this usually on company time and at 
company expense. In the face of this condition, a union 
which could not gain recognition, which could not bargain 
for better wages, hours or working conditions, which could 
only undertake friendly and uplift work, would be an 
anomaly. It could not collect dues for performing humani- 



Economic Democracy 517 

tarian duties whicli the works councils perform largely at 
company expense and it would gradually dwindle in power 
and influence. In theory, the two may be termed supple- 
mentary, but in actual life the works council when effi- 
ciently handled covers the ground so thoroughly that there 
is nothing essential left for the union to do. Hence, as a 
matter of plain industrial fact, the efficiently handled 
works council tends to be exclusive of the labor union. The 
course of contemporary events indicates that the works 
councils are in fairly exclusive control of collective bar- 
gaining in most companies where the councils are employed 
and the trade unions in fairly exclusive control of collec- 
tive bargaining in most other cases where any form of 
collective dealing is in vogue, with occasional exceptional 
.cases where the two stand in some supplementary rela- 
tionship. 

All lines of thought on these issues of industrial democ- 
racy lead back to the great fact that the war and post-war 
period set loose a new flood of human energy in the direc- 
tion of more control by labor over its own life in industry. 
Before the war the emphasis in industrial thinking was 
upon less poverty, better wages, shorter hours and better 
working conditions. To-day the emphasis is upon labor's 
right and ability to participate in the government of in- 
dustry. The former demands have not been abandoned, 
but they have been co-ordinated with a greater demand 
that with better wages, hours and working conditions must 
come a new degree of labor control over industrial matters 
which deeply affect the life and welfare of labor. Some 
application of the principle of self-determination to the 
laborer's position in industry is looked upon as the pre- 
requisite of any serious industrial democracy. "Whether 
the instrument be a labor union or a works council, the 
worker feels impelled toward a new status as one of the 
controlling influences in the management o£ industry. The 
concise interpretation of Sidney Webb, expressed in 1920, 
sums up the situation in both America and Great Britain : 
"The new ideas which are to-day taking root in the trade 
union world center round the aspiration of the organiza- 



518 Economic Democracy 

tions of manual workers to take part — some would urge the 
predominant part, a few might say the sole part — in the 
control and direction of the industries in which they gain 
their livelihood."^ 

This being the plain fact of the case, it is imperative to 
realize that beneath the movement for control lies a truly 
enormous psychological force. Some of the deepest in- 
stinctive energies of millions of human beings are seeking 
for an opportunity of expression. At this particular stage 
of industrial progress an outburst of powerful forces of 
human nature has appeared pointing toward some form of 
democratic control of economic life. It would be psycho- 
logically unsound and economically disastrous to give such 
untrained human energies free reign. But it is both sound 
and necessary to provide helpful channels of expression for 
such human forces, to accustom instinctive energies to self- 
restraint and self-control, to subject them to adequate 
working discipline, to repress vicious and pernicious forms 
of expression, to educate and enlighten and inform men to 
understand themselves and others in order that the nervous 
breakdowns and the psychic revolts of a period of indus- 
trial transition may be healthfully averted, and to raise the 
level of intelligence among the rank and file of laborers so 
that they may be enabled to make the right adaptations 
between human nature and economic institutions. The 
reshaping simultaneously of men and institutions is the 
secure pathway toward industrial democracy. 

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Economic Democracy 519 

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Lbwisohn, S. a.: Modern Management, Atlantic Monthly, Vol. 

126; pp.415 ff. 
HoBSON, J. A.: Evolution of Modern Capitalism 



INDEX 



Ability, unrealized, 223-225 

Abnormal psychology, 63—66 

Acceptances, bank, 426 

Accidents, industrial, 141—143 

Accounting, 253—255 

Adams, T. S., 448 

Adaptation, economic, 453—520 ; 

human, to economic environment, 

52-69 
Advertising, 299-305, 356 
Americanization, 161—162 
Anderson, B. M., Jr., 348, 382-384, 

391-392, 436 
Automatic machinery, 78—80; effect 

on labor, 99-104 

Banks, 366 ff.; agricultural, 398- 
400; commercial, 371-384; cor- 
porations and, 271—274; federal 
reserve, 404-427; foreign invest- 
ment, 396-398; functions, 373- 
380; international, 416-427; in- 
vestment, 384-389; reserves, 377; 
savings, 393-394; trust com- 
panies, 394-396 

Bargaining. See Collective bar- 
gaining 

Bassett, W. R., 10 

Bimetallism, 368 

Bloomfield, D., 512 

Bonds, 210-211; foreign, 396-398; 
investment banking, 384—389 

Brandeis, Louis, 90, 236, 387 

Bryce, James, 486, 501, 514 

Business combinations. See Com- 
bination 

Cannon, W. B., 59-60, 66 

Capital, 175—234; production and, 

73 
Carver, T. N., 55-56, 101 
Chance, inequalities due to, 232—234 
Checks, 375-380 
Chemistry, economic applications, 

83-87 



Class feeling, workers', 101-102 
Clayton Act, 340-344, 440, 468-478 
Clearance, bank, 401-404, 415-416 
Collective bargaining, 129—135, 505— 

518 
Combination, business, 242—244, 
258-276; price policies of, 327- 
336 
Commons, J, R., 56, 159-163, 205, 

231, 441 
Competition, 256-277, 327-330, 345; 

public control and, 453—486 
Concentvation, business, 242—244, 

258-276, 327-336, 453-486 
Conservation, 19 
Consumption, control of, 296—363; 

description of, 189-193 
Contract, freedom of, 206-208 
Control. See Public control 
Cooley, C. H., 97, 102, 109, 193, 349, 

357, 361 
Co-operation, economic, 274-277 ; 

consumers', 362 
Copeland, M. T., 297 
Corporation, characteristics of, 208— 
225; extent of, 241—242; manage- 
ment of, 244—253; securities of, 
384-393 
Cost of production, price theory, 

281-285 
Credit, 366 ff.; commercial, 371- 
384; dangers of, 427—450; foreign, 
416-427; forms of, 372-373; in- 
vestment, 384—389; psychology of, 
441-450; rural, 398-400 
Curiosity, psychology of, 32—37 
Custom, Visages and, 133—135 
Cycles, business, 427-450; control of, 
431-437 

Demand, creation of, 296—363 
Demand and supply, price theory, 

285-315, 344-363; wage theory, 

118, 160 



521 



522 



Index 



Democracy, ecoilomic, 129-135, 138- 

141, 268-270, 499-518 
Deposits, bank, 374-380, 411-412 
Dewey, John, 35, 90, 349, 456-458 
Dewing, A., 208, 213, 250, 263, ^72, 

274, 386 
Discount, 384 

Discipline, adaptation by, 54—56 
Distribution, wealth and income, 

177-187, 236-277 
Drury, H. B., 80, 114 
Duncan, C. S., 291, 297, 309, 314 

Economics, defined, 1-2, 69, 199; 
mechanical and scientific basis of, 
72-98 

Edge Act, 425-426 

Electricity, significance of, 74—76, 
88-90 

Elimination, adaptation by, 56—57 

Ely, R. T., 184, 194, 197, 199, 203- 
207, 332 

Emery, H. C, 308, 346 

Engineering, industrial, 93—98 

Environment, economic, 52—69 ; 
worker and, 141—149 

Eugenics, 167-170 

Exchange, domestic, 401—404; for- 
eign, 417-427 

Executive, technique of, 253—258 

Fairchild, H. P., 160 

Farm credits, 398-400 

Fatigue, 99-115 

Fear, 24-26, 108-109, 141-143, 444 

Federal Reserve System, centraliza- 
tion under, 405—406; clearance, 
415-416; cycles, 430-432; de- 
posit currency, 411—416; foreign 
banking, 425—428; note issue, 
406—411; organization of, 404; 
reserves, 412 

Fetter, F. A., 168 

Finance, 366-450 

Fisher, Irving, 227, 374, 434 

Flight and fear. See Fear 

Foreign, credit balance, 417—418; 
exchange, 417—427; investment, 
396-398 

Freud, S., 58, 61, 64 

Friday, David, 73, 136-138, 180-187, 
221-222, 430, 436-437, 449 

Functions, economic, 72-452 



Geology, economic applications, 87— 
88 

Gold, standard, 368-371 

Gompers, Samuel, 149 

Government control, 453 ff. ; war- 
time, 458-460 

Gregarious instinct, 21—23 

Habit, 41-43, 133-135, 296-363 

Hadley, A. T., 204, 351 

Haney, L. H., 212, 259 

Health, workers', 142-144 

Hobson, J. A., 115, 180, 189, 271, 

332, 341 
Hollander, J., 123, 124 
Hollingworth, H. L., 300 
Hoover, Herbert, 9 
Hours of work, 110—115 
Housing instinct, 29 
Hoxie, R. F., 102, 155-157, 507 
Human nature, organization of, 39— 

51 
Hunting, instinct of, 29 

Imitation, 43—46 

Immigration, 157—164 

Incentives, 93-97, 127-129; non- 
financial, 144—149 

Income, analysis of, 187—232; an- 
nual, 178-179; distribution of, 
177-187 

Inequality, pyschological, 48—51; of 
income, 183-187, 222-232 

Inheritance, 225-230 

Instinctive tendencies, adaptation 
of, 52 flf., 453-520; definitions, 
1—7; discipline, 54—56; elimina- 
tion, 56—57 ; property and, 195— 
199; rationalization, 60—63; re- 
Volt, 63-68; sublimation, 57-61 

Instincts, economic expression of, 
8-38 

Institutions, economic, 72 ff. ; finan- 
cial, 384-403, 437-441; of prop- 
erty, 193-232 

Insurance, 232-234 

Intelligence, 32-37; of labor, 149- 
157; tests, 48-51 

Interest, 183—185; eff'ect on saving, 
192, 447, 450 

Interlocking directorates, 440 

Interpretation of facts of wealth, 
187-199 



IndeoB 



523 



Interstate Commerce Commission, 
461-467 

Inventors, 93-97 

Investment banking, 384-389; for- 
eign, 396-398 

James, W., 29, 34, 59 

Jenks, J. W., 159, 232, 329-333 

Job, the laborer's, 104—110 

Kemmerer, E. W., 377, 404 
Kelley, R. W., 147 
Ivindness, psychology of, 17-18 
King, W. I., 73, 135, 168, 180-187 
Kitson, H. D., 144, 146 
Knoeppel, C. E., 144-145 

Labor, democracy and, 487—498; 
environment, 141—149; function, 
99-104; government control, 477- 
479; mind of, 149-157; part in 
production, 99 flf. ; power of, 138— 
141; public opinion, 482-486; 
skilled vs. unsldlled, 158-159; 
unions, 505-518; visages, 116-138 

Laissez faire, 276, 363 

Laski, H. J., 458 

Lippmann, W., 12, 58, 362 

Loans, bank, 373, 380; forms of, 
381-384 

McDougal, W., 2, 6, 21, 24, 42, 44, 

167, 171 
Machinery, 72-98 
Management, efficiency of, 149—150; 

finance and, 437—441; power of, 

205-215; technique and responsi- 
bility of, 236-277 
Marginal theory, 281-315 
Markets, definition, 279; mechanism 

of, 313—318; principles and 

strategy, 279-364 
Marshall, Alfred, 96, 254, 267, 270, 

305, 308, 328, 347, 447, 494 
Mechanical factor, 72 ff . ; automatic, 

77-80; labor and, 99-104 
Meeker, Eoyal, 122, 192 
Mental activity, disposition to, 32— 

38 
Migration, psychology of, 29—30 
Minimum, principle of, 216-222 
Mitchell, W. C, 358, 430, 434 
Money, definition, 366; forms, 367- 

372; gold and, 367-368; spending 

of, 346-361 



Monopoly, and income inequality, 
230-234; and prices, 327-363 

Monotony, 99-104 

Motives, 1-71; consumers', 346-363 ; 
progress, 93-97, 127-129; prop- 
erty and, 195-232 

National viewpoint, 171 
Notes, Federal Reserve, 406—411 

Ogburn, W. F., 122 

Opinion, public, power of, 482—486 

Orth, S. P., 204 

Ownership, income for, 181—185; in- 
stitution of, 175 ff., 208-216; 
labor view of, 151—152 

Parental instinct, 16—18 

Parker, C. H., 58, 65, 79 

Parmelee, M., 28, 35, 42, 44, 123 

Patten, S. N., 31, 165-166 

Pigou, A. C, 189 

Play, psychology, 30—31 

Population, 19-21; economic phases, 
164-171; immigration and, 157- 
164 

Possession, psychology of, 10—13, 
97, 195-198 

Pound, Roscoe, 206 

Poverty, 116-130 

Power, natural, 74—77; of labor, 
138-141 

Price, fixing of, 343-346; policies 
of, 305-363 ; stabilization of, 433- 
437; system of, 76-77, 366; theo- 
ries of, 281-315 

Production, 72—171; national vol- 
ume, 187-189. See also Cost of 
production 

Profit sharing, 128 

Progress, economic, 453—458 

Property, a group of rights, 199— 
208. See Capital 

Psychology, economic, 1-71; and 
consumption, 346—363; of credit, 
441-451; of radicalism, 492-498; 
of reform, 479-482; of selling, 
295-363; of unionism, 511-513 

Public, control, 453-482; opinion, 
482-486 

Publicity, 483-486 

Pugnacity, psychology of, 26-28 

Quantity theory of prices, 434-436 



524s 



Index 



Radicalism, 487—492; analysis of, 

492-498; forms of, 489-492; in 

unions, 508-509 
Railroads, labor control, 135, 464— 

465; regulation of, 461-467 
Rationalization, 60-63; by labor, 

149-157 
Reform, 479-482 
Regulation, general, 468—479; of 

railroads, 461—467 
Rent, 182-183, 215-222 
Revolt, psychology of, 63—69 
Rights of property, 199-214 
Rivalry, psychology of, 26—28 
Rockefeller, J. D., Jr., 9, 12 
Roosevelt, T. R., 16, 47, 171, 229 
Root, Elihu, 251 
Ross, E. A., 158, 194, 228 
Rural credit, 398-400 
Russell, Bertrand, 167 

Safety, from accident, 141—143 
Sales' policy, 287, 290, 296-363 
Savings, amount of, 73-74, 180- 

181; banks, 393-394; principles 

of, 346-363; psychology of, 189- 

193, 446-450 
Science, applied, 72 ff.; of economic 

organization, 90—94; of progress, 

455-457 
Seager, H. R., 265 
Self-assertion, psychology of, 13-15; 

of labor, 138-141 
Sex instinct, 20-21, 52-69 
Sherman Anti-Trust Law, 276, 340- 

344, 468-476 
Size, business, 236-239 
Slichter, S. H., 100, 107, 108 
Socialism, 487 ff. ; analysis of, 492— 

498; forms of, 489-492 
Southard, E. E., 68 
Speculation, 308-310; stock ex- 
change, 388-393 
Stabilization of business, 430—437 
Standard of living, 120-127, 340- 

363 
Standardization, 265-267 
Statistics, aid to management, 253— 

255; marketing, 305-308; wealth, 

175-234 
Stock exchange, 389-393 
Stocks, 208-216 
Storage, marketing and, 309—311 



Style of product, 298 
Sublimation, psychology of, 57—61, 

502-505 
Submissiveness, psychology of, 15— 

16 
Suggestion, psychology of, 43—46 
Supply and demand, price theory, 

285-315, 344-363; wage theory, 

118, 160 
Surplus, principle of, 215—222 
Sympathy, psychology of, 43—46 

Taft, W. H., 512 

Taussig, F. W., 95, 228, 284, 345 

Taxation, 229-230, 350-360 

Taylor, F. W., 91, 99 

Tead, 0., 20, 147 

Technology, economic, 72— "^S; and 

labor, 99-104 
Tendencies. See Instinctive tend- 

Thorndike, E. L., 17, 28, 32, 39, 42, 

55, 361 
Thought, psychology of, 32-37, 48- 

51; of labor, 149-157 
Transportation, technology of, 80- 

83; regulation, 461-467 
Trotter, W., 22, 33, 45, 65 
Trust companies, 394—396 
Turnover, labor, 104-110, 160 
Types of management, 239—244 

Unemployment, 103-110, 160; busi- 
ness cycles and, 430—437 

Unions, analysis of, 505—518; bar- 
gaining power, 129-133, 138-141 

Value, definition, 279-281; of 
money, 434-437; theory of, 282- 
296 

Vanderlip, F. A., 427 

Van Hise, C. H., 331-332 

Wages, 116-138; factors in, 120- 
138; immigration and, 159—160; 
incentives, 93-97, 127-129; in- 
crease, 135—138; share in national 
income, 182-183, 223; theories of, 
116—120. See also Demand and 
supply 
Wallas, Graham, 17, 32, 64, 495 
War Finance Corporation, '^26-427 



Index 



525 



Wealth, analysis of, 187-232; defi- 
nition, 175-177, 187-189; meas- 
urement of, 177-187 

Webb, S., 269 

Welfare work, 128-129. 141-149 

Wilson, Woodrow, 126, 344, 443, 477, 
510, 515 

Wolfe, A. B., 447-448 

Work, hours of, 110-116. See Labor 



Worker, mind of, 149-157 
Workmanship, psychology of, 8—10, 

95-97, 103 
Works councils, 502—505 

Yerkes, K. M., 94 

Zimmern, A. E., 199 



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